Even though the U.S. has officially entered an “unprecedented” recession, spelling the end of the most enduring bull market in history in the wake of the novel coronavirus pandemic, environmental, social and governance (ESG) investing has proven so far to be pandemic-proof in terms of investor optimism. That bodes well for companies that want to be on the right side of history when the world is past this current emergency.
ESG-lens investing, also known as sustainable investing, has shown itself to be robust as the U.S. and global economy have taken a major hit and markets have been shaken to their core. Sustainable funds attracted record inflows in the first quarter amid the market turmoil, according to data from Morningstar, and many of these funds are outperforming the broader market for the year.
While equities descended rapidly into a bear market halfway through the quarter, estimated net flows for the 314 open-end and exchange-traded sustainable funds available to U.S. investors reached $10.5 billion in the first quarter. That increase easily eclipsed the previous quarterly record set in the fourth quarter of 2019, Morningstar reported. Over the past 15 years, ESG-lens investing has grown to over $30 trillion in assets under management.
Analysts and investors have been parsing out the reasons for the resilience of ESG investing during a pandemic. Many are looking anew at a company’s social and governance performance (not just the “E” of environmental) as they scrutinize corporations’ responses to the pandemic. As TriplePundit has reported, the leaders during this crisis are quickly emerging while laggards are more exposed than ever for not having integrated sustainability into their business model or operations.
And now the more recent social upheaval in the U.S. over the widespread protests for racial equality are shining a spotlight on ESG-lens investing. Calvert Research and Management, a prominent sustainable investing firm, is calling for companies to “accurately assess their racial diversity” and make it public, provide pay equity disclosure across race and gender, and ask companies to publicly state what they are doing to combat racism and police brutality, Barrons reported. According to Calvert’s CEO John Streur, racism “is an ESG problem.”
Nasdaq’s chief economist Phil Mackintosh is also betting that calls for social justice and the spotlight on racial inequality in corporate America will fuel interest in ESG, CNBC reports. “What you want is so much money chasing those good factors that the corporates themselves want to project better factors and behave better,” he said.
The COVID-19 outbreak could turn the tide for ESG investing, and for companies that responded to the crisis by focusing on long-term goals, rather than near-term profit at all costs.
“COVID-19 presents us with the opportunity to retire the ESG label in favor of recognizing that what we’re really talking about is Finance 101. That is, the management of issues that are self-evident and influence good long-term corporate financial outcomes. Companies with poor ESG records may ultimately deflate shareholder value,” as Andrew Parry, head of sustainable investment at Newton Investment Management, wrote recently in MarketWatch.
ESG continues to retain investor confidence as an important marker of corporate strength. In a recent survey of wealth managers across the United Kingdom carried out by the Financial Times and market research company Savanta, almost 9 in 10 wealth managers polled believed that the Covid-19 pandemic would result in increased investor interest in ESG investing.
Rob Morgan, pensions and investments analyst at the U.K.-based investment management firm Charles Stanley, told the Financial Times that the pandemic has acted as a “reminder that we are all part of something much bigger and we have to think of others, not just ourselves. That feeling can also be reflected in our investments through socially responsible investing, so there is a direct link.”
Asset managers are equally bullish on ESG investing, even in the current economy. BlackRock, the world’s biggest asset manager, with over $6 trillion in assets, has shown no sign of turning its back on sustainability, as 3p has reported. In a research note last month, stated that 88 percent of indexed funds with a focus on sustainability did better than their non-sustainable counterparts in the first four months of 2020.
Similar predictions on the durability of ESG investing come from Goldman Sachs and JPMorgan Chase, CNBC reported, with JPMorgan telling clients: “We see the COVID-19 crisis accelerating the trend to ESG investment.”
It is a sign that this trend, which has been building for some time, is here to stay — even when the world has been turned upside down. A recent institutional investor survey from Morgan Stanley showed that asset owners increasingly embrace sustainable investing, with 80 percent already integrating ESG factors into their investment process, up from 70 percent in 2017. Nearly six in ten of the investors surveyed can envision a time when they will only allocate to investment managers with a formal approach to ESG.
“These results provide an additional proof point that sustainable investing has become table stakes,” Audrey Choi, chief sustainability officer and CEO of the Institute for Sustainable Investing at Morgan Stanley, said in a press release.
It may be too soon to definitively make the case that the pandemic has advanced the strategic case for sustainable investment. But as Georg Kell, chairman of a global asset management firm and a founding director of the U.N. Global Compact, writes in Forbes, “Intelligent ESG investing is bound to become the new normal. Those corporations that fail to transform their business models will be replaced by others that have the adaptive flexibility to thrive in a new world that values smart, clean, and healthy activities.”
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Based in southwest Florida, Amy has written about sustainability and the Triple Bottom Line for over 20 years, specializing in sustainability reporting, policy papers and research reports for multinational clients in pharmaceuticals, consumer goods, ICT, tourism and other sectors. She also writes for Ethical Corporation and is a contributor to Creating a Culture of Integrity: Business Ethics for the 21st Century. Connect with Amy on LinkedIn.