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Investing with a conscience

Covid-19 has arguably increased the focus on Environmental, Social and Governance (ESG) investing.

image of a brain with a compass inside

by
Mark Feely

in Features

17.11.2020

The Covid-19 crisis has shown that the world can make rapid changes that improve our environment, health and wellbeing. Well-managed companies that consider the planet and society at large are likely to be the ones that thrive in the future – as investors continue to focus on the wider good.

The changes to society as a result of the Covid-19 pandemic are likely to be far-reaching. A larger proportion of the world’s population than before will adopt homeworking as their preference once the health crisis abates. They have discovered that they prefer working from home – at least for some of the time. This will lead to lower pollution levels in the major metropolitan areas, a genuinely positive development. This is just one major change we can expect to see once the world emerges from the Covid-19 crisis. There will be many other significant adaptations too. 

Some of the most striking images of the early months of the pandemic were of the clear skies over Beijing. The usual haze of polluted air was nowhere to be seen above the Chinese capital. Unfortunately, this is no longer the case – air pollution in China is now higher than before the start of lockdowns. Polluted air is one of the major causes of premature death and has been linked to higher fatalities amongst Covid-19 sufferers. There would be clear health benefits from permanently lower pollution, as well as good progress on climate-change aspirations, should these issues be addressed. 

Covid-19 has arguably increased the focus on Environmental, Social and Governance (ESG) investing. How has a company managed its workforce during the pandemic; what efforts have been made to reduce its carbon footprint; has the company been active in the community? As a result, investors are increasingly favouring those that are evolving and contributing positively. Companies offering technical solutions to the world’s problems are trading well.

What is ESG investing?

At its very basic level, ESG refers to the three main elements that measure the sustainability and impact on society of an investment. It does not simply focus on what product or service a company provides – but how it is provided. ESG investing is complex and multi-faceted.

ESG is not the same as a morals-based ethical approach. This falls under the umbrella of Socially Responsible Investing (SRI). An ethical investment, for example, would usually exclude an oil company because of its detrimental impact on the environment. Under ESG, this would not necessarily be the case.

Even though environmental considerations are likely to be an important consideration under ESG, any efforts the company was making to negate the impact on the environment, could be taken into account, as well as a broad appraisal of other factors involving its governance and broader impact on society.

How has this form of investing performed during the pandemic?

Overall, the performance of companies with strong ESG credentials has been resilient and two factors have contributed to this:

  • Momentum: As more investors are attracted to companies with these characteristics this supports prices. In the first quarter of 2020, flows into global sustainable open-ended funds were 41% higher than the equivalent period in 2019 (source: BlackRock)
  • Better supply chain management and corporate governance - companies with high ESG ratings are more likely to have fully-audited their supply chains, employee practices and internal logistics in respect of external risks. Their more resilient qualities have tended to help them navigate the impact of Covid-19.

Investments of the future

Of course, there is no guarantee that companies with stronger ESG credentials will outperform in the future – but the impact of Covid-19 has supported the investment industry’s move towards making this a core part of their decision-making process. Companies are also making changes to ensure they are ranked higher than their industry rivals. 

By taking ESG factors into account, investors are likely to benefit from higher returns as companies continue to focus their efforts in these areas. This is why this form of investing is becoming more popular. Indeed, we believe it will soon become standard practice for ESG characteristics to be considered prominently alongside traditional financial metrics. ESG really is looking like the future of investing.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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