If you are a supporter of ESG investing (combining traditional investing with environmental, social and governance related issues), then COVID-19 may have a silver lining for you. ESG investing has been playing an outsized role in investment decisions since the beginning of the year. The virus has exposed the critical need for companies to beef up practices that can lead to greater resiliency and sustainability. Companies that are demonstrating broad-ranging support for employees, solid customer relations and a thoughtful corporate culture have seen stronger relative financial performance, resulting in new investors.
According to asset manager Black Rock, when investors have sought to rebalance their portfolios during this crisis, “they are increasingly preferring sustainable funds over more traditional ones.” In Q1 global sustainable ETFs and mutual funds brought in $40.5B in new assets, a 41% increase year over year. US sustainable funds attracted a record $7.3B for the quarter.
Morningstar research showed 51 out of 57 of their sustainable indices outperformed their broad market counterparts, while MSCI reported 15 out of 17 of their sustainable indices outperformed their broad market indices in the first quarter of 2020. In addition, Morningstar found that 70% of sustainable mutual finds performed in the top half of their respective Morningstar categories for this same time period.
The outperformance is not just tied to Q1 2020. “There are more than 2,000 studies that show that companies with sound ESG practices – meaning that companies identify, address and mitigate these [ESG] risks successfully – produce better corporate financial performance,” says Meredith Jones, partner and ESG practice lead at Aon, a global professional services firm. Bank of America published one such study recently finding that among US companies in the S&P index, those that scored in the top fifth of ESG rankings outperformed their counterparts in the bottom fifth by 3 percentage points every year for the past 5 years.
Until recently, the “E” and “G” in ESG investing have been the dominant themes that investors and companies have focused on. The Environment, which addresses such issues as climate change and energy usage, as well as Governance, which focuses on management and transparency, have overshadowed the S (social issues) in ESG. COVID-19 has changed that, redirecting some of the attention towards how companies meet the needs of employees, engage their customers and support their communities – key social issues.
When COVID hit, companies that were able to readily segue to remote learning – through established infrastructure and communications networks as well as strong cyber security protections, were most likely to keep their businesses on track. In addition, companies that had previously established sick-leave policies that could be applied to quarantining and caring for or loved ones, were better able to weather COVID-related work interruptions. Moreover, best practices like flexible scheduling, personal protective equipment, proper cleaning and social distancing have helped certain firms limit employee turnover. In other words, the better prepared a company was and the more adaptable it could be during this crisis, the more resilient it could become in the face of the pandemic. Resilience planning and disaster preparedness are key focal points of ESG investing.
In its June 29, 2020 issue, Barron’s Magazine ranked the US’ most sustainable companies on how they addressed social issues and called attention to a number of corporations which have taken steps to address some of the inequities exposed by COVID-19. Examples of these actions include rebranding or removing controversial products, increasing local community impact funding, and revising recruitment and training practices to encourage more inclusivity and diversity.
While sometimes it may seem as though negative news is relentless, and the pandemic merciless, COVID-19 has accelerated interest in establishing mandates and best practices that can help to lead us to a more sustainable, resilient and equitable society. The UN Secretary General Antonio Guterres summarized this hope, “We need to turn the recovery into a real opportunity to do things right for the future.” The UN’s goal is to devise a blueprint for a healthier planet and a society that leaves no one behind. You don’t have to be an ESG investor to appreciate that goal and the innovation and dedication that will go into making it happen.
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