Webinar on Sustainability During COVID Crisis: The Changing ESG Investing Landscape
The COVID 19 pandemic has affected businesses, large, medium, and small. Companies’ leadership is now forced to innovate for continued progress and survival. Even as businesses race to reopen, they will battle social and economic crises on their path to recovery.
Investor action, in the short-term and during the longer-term recovery phase will have a significant impact on how businesses evolve. In this article, we explore the trends in ESG Investing leading up to the pandemic and what early indicators tell us about where we go from here.
The Growing interest in ESG Performance and ESG funds
The term ESG investing was first used in 2004 in a report titled “Who cares wins” by the UN Global Compact and the Swiss government. This was followed by the introduction of UN Principles for Responsible Investing or UN PRI in 2006 at the New York Stock Exchange.
Asset management firm Robeco defines ESG funds as portfolios of equities or bonds for which environmental, social and governance factors have been integrated into the investment process. ESG has been a topic of interest in the investment business in recent years but the COVID19 crisis has made it more relevant than ever. In this article, we discuss the recent trends that have emerged in ESG investing during the coronavirus pandemic.
The concept of ESG investing has gained attention in the past decade as investors and asset managers realized that environmental, governance and social aspects affect the stock performance as well as the accounting profitability of an organization as suggested by a 2015 Harvard Business School study. Between 2006 to 2020, the number of UN Principles for Responsible Investment signatories jumped from 63 to 3038. The current number of signatories represent $103 trillion as AUM which accounts for nearly 30% of the total global wealth. Further, the Global Sustainable Investment Alliance estimates that global ESG investments reached nearly $31 trillion in 2018, about 7 times the value in 2014. Despite the increasing interest in ESG factors across generations, some investors still believe that the financial performance of a company is the sole criterion for making an investment decision.
ESG funds passed the coronavirus test
The unpredictability of the virus has halted business operations and caused stock market crashes. The performance of ESG funds, however, stood out in these turbulent times. According to Bloomberg, the S&P 500 lost about 30% of its value in the first quarter of 2020. The average ESG fund, however, fell only 12.2% during the same time period. Additionally, global sustainable funds saw inflows of $45.7 billion, while the broader fund universe had an outflow of $384.7 billion in the first three months of 2020, according to Morningstar. A plausible explanation for the excellent performance of the ESG funds can be the way the ESG portfolios are constructed. Information technology and Healthcare are the two most represented sectors on the S&P 500 ESG Index. Both of these sectors boomed during the pandemic contributing to higher returns. Furthermore, ESG Indices often exclude heavy polluting companies such as aviation and cruise operators, both of which suffered hefty losses owing to coronavirus. Despite these sector-related factors, the pandemic has reasserted that adopting sustainability as a core value is the only way forward for investors and businesses alike.
Where do we go from here
In light of the performance of the ESG funds amidst the coronavirus spread, two new trends have emerged. First, stakeholders want to know more about the efforts and initiatives companies have taken to tackle the challenges that have emerged due to the virus. Stakeholders, especially investors wish to hold companies accountable for their actions making stakeholder engagement extremely important.
Secondly, the pandemic has highlighted the importance of ‘S’ in ESG. ESG funds, driven by social metrics such as job satisfaction of employees, the strength of customer relations, or the effectiveness of the company’s board, have outperformed their peers. With most of the conversation being centered around climate change, social factors have been overshadowed by the environmental aspect. Since the virus brought disruptions in the supply chain and further highlighted the need to focus on employee health and safety, both investors and businesses realized that social factors extend beyond philanthropy and charity.
A group of more than 300 institutional investors representing over $9.5 trillion in assets under management have issued a statement titled “Investor Statement on Coronavirus Response”. Through this statement, investors are urging the business community to focus on social areas like paid leave, supplier and customer relations, employee health and safety, and retention of employees.
What does the future hold for sustainable investing?
Since the pandemic is far from over, it is difficult to ascertain how the post-crisis investment environment would look like. Seeing the resilience of the ESG funds, investment behavior is likely to experience a shift from traditional portfolios to sustainable ones. Nonetheless, the burning question still remains unanswered – will ESG investing become the new normal?
To get more insights into investors’ perspective on COVID19 and what the future holds for ESG investing, tune into our webinar on “Sustainability during Covid19” to be held on 16th July 2020.