Coronavirus is strengthening the call for ESG Investing
The coronavirus pandemic has been a global human tragedy and for some time will impact our lives on a daily basis. It is still too early to say how this will play out and the impact this will have on generations around the world, however one area that we know it is likely to change forever is our focus on sustainability.
Investors are going “all in” on environmental, social and governance (ESG) themes — and so far their bets have paid off. If anything, the pandemic has only reinforced fund managers’ belief that ESG is worth worrying about.
The pandemic is a wake-up call for the world around global sustainability. The world’s largest environmental and social challenges will not be able to be solved by government policy alone.
Whilst governments can create legal backdrops and policies towards a more sustainable future, we will ultimately require innovative change and the financial capacity of the private sector and the global population working together towards the common goal of conquering coronavirus. This will drive us towards a more sustainable future.
What is a more sustainable future?
The UN has created 17 Sustainable Development Goals (SDGs) for governments and companies to aspire towards. The goals (which can be viewed at sustainabledevelopment.un.org/sdgs) are an urgent call for action by all countries- developed and developing- in a global partnership. They recognise that ending poverty and other deprivations must go hand in hand with strategies that improve health and education, reduce inequality, spur economic growth whilst tackling climate change and working to preserve our planet.
We are already seeing private company executives put this universally at the top of their agendas and considering how well they perform against these goals, which is due to investor pressures with regards to a company’s ESG credentials.
Prior to this crisis there was already a meaningful and increasing focus on ESG investing to help create a more sustainable world. It is likely that this focus will now surge due to how the pandemic has altered society’s values.
Investors have been voicing their concerns about sustainability for several decades however until recently they have not translated their words into action. It is now clear that investors will soon be holding corporate leaders accountable for not just financial performance but also on their ESG performance as is already being seen.
We have previously discussed the fundamentals of ESG Investing in the Autumn/Winter 2019 issue of our Insight newsletter, where you can find a list of some of the factors which contribute to a company’s ESG credentials.
Does investing with an ESG mandate have an impact on investor returns?
Although investors historically voiced concerns around sustainability there was a view around a perceived performance trade off should they invest via an ESG mandate, therefore for decades investors have avoided this approach. ESG investing has also been made more difficult for investors to access due to the lack of retail investment funds available to private investors to gain exposure to a suitably diversified portfolio.
In theory, any limiting of an investor’s opportunity set could have negative consequences but in practice, investments screened on environmental, social and governance (ESG) criteria have performed well.
There are now a proliferation of sustainable (ESG) funds available to retail investors in the UK with new launches from global fund houses almost on a weekly basis. This has enabled globally diversified portfolios to be constructed for investors across a range of asset classes whilst allowing them to invest for a more sustainable future.
With this increased investment choice investors are also monitoring performance. There is a growing body of research globally showing a positive link between the ESG score of a company and its financial performance. In effect the research is showing that companies built for the future with a high ESG score naturally promote sustainable long-term returns.
The research is starting to show early on that companies with the strongest ESG practices relative to their peers are by definition higher quality companies with stronger cash flows. Various studies are now showing that ESG screened companies tend to have healthier balance sheets, stronger competitive advantages and lower volatility than their mainstream counterparts. These studies are becoming more consistent and are starting to show that investments that score well on ESG are linked to a positive long-term investor experience.
One study by global research agency Morningstar shows that ESG considerations are material to a company’s financial results:
Environmental – environmental stewardship is not just good for the planet but it is also about controlling costs, avoiding damaging incidents and positioning for tomorrow’s economy.
Social – treating workers well and practising diversity not only benefits society but also helps a company attract and retain talent which is critical in a knowledge-based economy.
Governance – good governance leads to better corporate decision making. Companies that consider ESG are likely strategic in nature and focused less on beating the next quarter’s earnings and more on creating an enduring long-term business.
So how do the performance of ESG screened investments compare?
Below is the performance of the MSCI ACWI Index versus the MSCI ACWI ESG Leaders Index from inception of the latter index which was 17.09.2013:
As can be seen above, the perceived trade off in performance has been unfounded and during the recent pandemic we have seen ESG investments perform better than investments not screened on an ESG mandate with less volatility.
Morningstar has also recently published a report which looked at 745 sustainable funds and compared them against 4,150 traditional funds. The ESG funds outperformed traditional funds across the board, beating them since the start of the pandemic as well as in the 10 years up to and including the coronavirus sell-off. The report found that returns were matched or bettered in all asset class categories – whether bonds or shares, in the UK or abroad.
How can I invest for a more sustainable future?
One way in which we can all help to make a difference is by choosing to invest our money into funds where the managers are investing in companies that work towards improving the environment, addressing social inequality or improving corporate governance.
ESG focused portfolios can deliver results in a wide range of market conditions and more and more investors are now looking to invest with ESG credentials.
We at The Private Office can provide you with advice around structuring your investment portfolio for a more sustainable future if this is important to you, and can provide you with access to a portfolio that is suitable for your views on investment risk and reward. We can also ‘blend’ some ESG exposure into your existing exposures.
The coronavirus pandemic is a global human tragedy but the unintended consequence of this deadly virus is that it may well speed up our global drive to a more sustainable future and a better world for humanity and nature both now and in the future.
If you would like more information, please get in touch.
Past performance is no guarantee of future returns. The value of investments and the income from them can fall as well as rise, you may not get back what you originally invested.