Covid-19 marks a new era for ESG investing

By Martin Hesse Time of article published Jun 15, 2020

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There's an oft-quoted saying attributed to investment guru Warren Buffett: “Only when the tide goes out do you discover who’s been swimming naked.”

The Covid-19 pandemic has proved an extreme low tide for the business world. Shaky companies have been left dangerously exposed, and many will not survive the next six months. There will be casualties among solid, well-run companies too, but the death rate will be lower.

In fact, it’s similar to how the disease is playing out in humans. The unhealthier you are, and the greater your level of co-morbidity – to use the current soulless medical term – the greater your chances of succumbing to the virus.

So what constitutes a healthy company? Traditionally, a company was judged solely on the state of its balance sheet. But in the past decade or so, there has been a growing trend for companies to be assessed in more holistic terms, particularly by a younger generation of investors.

The pandemic has hastened this sea-change. The old-style profit-driven approach to business, built on mantras such as “business and sentiment don’t mix” and “greed is good”, just doesn’t cut it during times of hardship.

Companies that have tried to exploit supply-demand imbalances at the expense of the consumer – such as selling face masks at outrageous prices – risk coming out of this period with their reputations battered. Those that are putting aside their drive for profits in order to help their communities (I salute the many that are doing amazing work) are the ones likely to be better supported in the future.

Not only are socially responsible, sustainable companies likely to come out stronger on the other side of this pandemic; they appear to have been more resilient going into it.

BlackRock is the world’s largest asset manager – it manages an astounding $7.4trillion (R123trln) of investors’ money. In a recent article, “Sustainable investing: resilience amid uncertainty”, Brian Deese, the global head of sustainable investing at BlackRock, makes a case for the resilience of companies that score highly on environmental, social and governance (ESG) factors.

Deese says BlackRock’s view is that companies with strong ESG profiles have the potential to outperform those with poor profiles. The pandemic-induced downturn was a key test of this view. In the first quarter of 2020, financial data provider Morningstar reported that 51 out of 57 of its sustainable-investment indices outperformed indices that measure the broader market, as did 15 out of 17 of index-provider MSCI’s sustainable indices.

“While this short time period is not determinative, it aligns with the resilience we have seen in sustainable strategies during downturns in 2015-2016 and 2018. Furthermore, these results are consistent with the research BlackRock has been publishing since mid-2018, demonstrating that sustainable strategies do not require a return trade-off and have important resilient properties,” Deese says.

What explains the resilience?

Deese says research by BlackRock has established a correlation between sustainability and traditional factors such as quality and low volatility. But there’s more to it than that. “Our research indicates that, in the current crisis, with its transformative and devastating impact on daily life, companies with a record of good customer relations or robust corporate culture are demonstrating resilient financial performance We believe this has been driven by a range of sustainability characteristics, including job satisfaction of employees, the strength of customer relations, or the effectiveness of the company’s board,” he says.

Another key piece of the story has been investors’ preference for sustainable assets during the crisis, Deese says. “As investors have sought to rebalance their portfolios during market turmoil, they are increasingly preferring sustainable funds over more traditional ones. In the first quarter of 2020, global sustainable funds brought in $40.5bn in new assets, a 41% increase year over year,” he says.

Jon Duncan, the head of responsible investing at Old Mutual, and Elize Botha, the managing director of Old Mutual Unit Trusts, explain that companies with higher ESG scores “are businesses that actively manage their environmental impact, treat their stakeholders well, and govern themselves in an ethical fashion ... They enjoy a stronger social licence to operate, lower staff turnover, better resource efficiency, lower cost of capital, better innovation and stronger access to markets, which are proven to result in better performance.”

Duncan and Botha believe that the pandemic will define the new “quality companies” of the 21st century.

“In a post-Covid-19 world, one thing seems clear: asset managers with a commitment to ESG will be at a distinct advantage over their peers, as will investors who see the long-term value of ESG investing,” says Duncan.

He says that not only are ESG-based investments expected to deliver superior returns in the long term, but they will help shift the global economy in a direction that is more environmentally friendly and socially inclusive.

Read here about Old Mutual's new ESG equity fund.


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