Sustainability challenges such as climate change, wealth inequality and human rights issues may have been at the forefront of investors’ mind in recent years, but the coronavirus pandemic is accelerating the trend towards ESG investing, with a renewed emphasis on social and governance factors.
The healthcare crisis is forcing individuals to reassess their values and the purpose of business and finance, and is bringing attention to how the modern economy, healthcare, education, financial and political systems are strongly interconnected.
“Data traditionally characterised as ‘social’ in ESG terminology has become more of a focus,” says Jackie VanderBrug, head of sustainable and impact investing, Merrill and Bank of America Private Bank. “Through this crisis, investors are recognising the importance of product health and safety factors, workforce policies like employee leave and childcare services, and employee satisfaction, which translates to engagement.”
Covid-19 has developed a greater understanding among wealthy individuals that creating an economy based upon our collective wellbeing is absolutely critical, as is the need to develop a society that is resilient and inclusive, she adds.
Companies are facing far greater scrutiny for decisions that impact employees, customers and society.
The extent to which Covid-19 is affecting priorities in ESG investing is offered by Truvalue Labs, a San Francisco-based ESG data group, which creates statistics on how company actions are being reported in news, social media and financial reports. From its new data-tracking site it emerges that Covid-19 represents more than 60 per cent of all ESG information captured on a daily basis, with employee health and safety and labour practices currently representing a “disproportionate” share of volume (49 per cent).
“The crisis is going to force a rethink of responsibilities companies have to their stakeholders beyond their legal obligations, to support workers, to direct their resources to social goals, to provide essential products to their customers and, at times, to put social priorities above profits,” says Andrew Howard, head of sustainable research at Schroders.
Conversations with companies over labour standards and security will become “louder and more demanding”, he adds.
Car manufacturers such as Ford and Ferrari and fashion firms including Armani, Gucci and Prada are partially converting production to make ventilators, face masks and lab coats, indicating the kind of role corporates can play in addressing social problems.
Especially at times of crisis firms can build greater loyalty, improve employee satisfaction and make or break their reputation in the marketplace. Employees who are more satisfied are also more engaged, which has a material impact on company performance and the broader culture of an organisation.
“Corporate behaviour in a time of crisis, both in how companies treat employees and customers, and their impact on society in a time of need, can have lasting implications, both positive and negative,” says Jessica Alsford, head of sustainability research at Morgan Stanley. “These factors can be linked to long-term performance and returns.”
When considering ESG factors, governance is first among equals, says Erika Karp, CEO of investment firm Cornerstone Capital. “Governance is a proxy for quality, a proxy for innovation, and a proxy for resilience and for long-term thinking.”
Integrating ESG factors into the investment process can contribute to a holistic, and more robust risk-management approach, and while even the best-governed companies would not have prepared sufficiently for a pandemic of this scale, they are still in a relatively good position to act decisively given their strong leadership, adds Ms Karp.
Evidence that sustainable investments outperform at times of crisis is emerging. Recent analysis from Fidelity shows a company’s market performance and ESG rating were positively correlated during extreme volatility in March.
Morningstar found that, in the first quarter of this year, most ESG-tilted index funds outperformed their closest conventional counterparts. This is also due to many ESG funds limiting their exposure to fossil fuels and other industries heavily reliant on oil and gas, such as airlines and cruise ships, which has insulated them from the collapse in the oil price.
“Sustainable funds appear to have benefited from owning companies with stronger ESG profiles – those that outperform on environmental measures, have strong employee benefits and relations and impeccable governance,” says Merrill’s Ms VanderBrug. “These features of ‘future quality’ may help companies to weather dramatic changes and challenges in markets over the long term. And long term continues to be the top lens for sustainable investing.”
