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How Covid-19 Fuels ESG Investing Boom

ESG investing beats expectations with focus on social impact.
The coronavirus pandemic has rapidly spread across the globe, creating a once-in-a-generation public health catastrophe. As a result, many countries, companies and investment instruments plunged into the recession. Financial markets have been roiled as investors try to define the strongest companies with flexible and developed strategies to avoid governmentally and supply chain challenges. It’s clear, during the next years a lot of industries will recover and tolerate the direct and indirect consequences.

Source: S&P Global Ratings.

The S&P 500® ESG Index provides a sustainable alternative to the well-known S&P 500, with similar risk and return and additional ESG principles. During the last year, the S&P 500 ESG Index has outperformed the traditional one. Morningstar reported 51 of their 57 sustainable indices outperformed broad market counterparts in the first quarter of the year, and MSCI reported 15 of their 17 did the same. As a result, by taking a longer-term view, investing strategies based on ESG considerations have performed well during the pandemic as it has avoided sectors such as fossil fuels, aviation and tourism which have been significantly affected by the crisis.

ESG Outperformance

Analysis of 3,297 open-end funds and ETFs globally that use ESG criteria

The overall trend toward responsible investing is likely to continue. The main drives are not only economic reasons but social as well. Many asset managers are going to be under the pressure to align more assets with some sort of ESG. At the same time, regulators are going to encourage the integration of ESG factors on a wider scale with some unified definitions.

Many experts assumed ESG focus would fade because of the pandemic. However, despite the importance of Environment and Governance, the companies started huge campaigns to support Social aspect of ESG principles.

Social Factor

The pandemic illustrates the huge role of social and human capital and their influence on well-functioning companies. This includes responsiveness to worker health and safety, effectiveness in managing wildly altered workforce conditions, adaptability to changing customer dynamics, and the level of support for the local community and societal needs.
health and safetyhow effective the company is at ensuring safe products and working conditions. These two elements have dominated most COVID-19-related discussions. Companies providing essential services will remain exposed to health and safety risks throughout the pandemic. That includes health care, utilities and waste management, retailers of food and health products, and providers of essential infrastructure industries. For companies operating in those industries, ensuring the health of staff, contractors, customers, and local communities will remain important in the coming months.
customershow effective a company is at building long-lasting customer relationships. Customer preferences have rapidly changed, for example, toward more online shopping and home delivery. Rising unemployment and low customer sentiment have started to reduce customer demand as well. Though some countries have passed or are contemplating fiscal stimulus packages, this will only mildly offset overall dwindling demand. As a result, customer satisfaction and adaptation to customers habits are in demand.
workforce and diversityhow the company is supporting a long-lasting, productive, and inclusive workforce. The pandemic blurs the line between work and home and could hurt employee productivity depending on the suitability of employee “home office” setups. For now, employees have to balance work with care responsibilities, particularly for children, elders, and people with disabilities.

communitieshow the company is supporting the global community. This pandemic has made clear the value that companies can provide to communities by responding to stakeholder needs. Community engagement involves financial resources to contribute to community needs that include investing in scientific research for a COVID-19 vaccine, testing kits, and providing income support for beleaguered industries.

Governance factor

Since the decision became a complex matter of weighing and balancing multiple factors, corporate management has faced a string of difficult decisions. The health and resilience of the company are in the centre. As a result, boards, which are a company’s governing body, should care not only about returns to shareholders, but about all factors that enable the company to create value over time.

Environment factor

The pandemic restrictions imposed to fight the spread of the disease have provided some short-term positive impacts on the environment. These include temporary improvements in air quality, lower greenhouse gas emissions, and lower levels of noise pollution. However,  there are negative consequences such as increased use of single-use plastics that should be considered to stimulate sustainable production and consumption systems to achieve long-term environmental benefits.

At the same time, additional regulations, international agreements support early defined policies aimed to decrease greenhouse gas emissions and use sustainable renewable energy.

Implications for investors

The COVID-19 pandemic highlighted that companies can no longer operate independently from societal and environmental issues, as investors recognise that these present clear financial risks. The integrating ESG factors into the entire investment process may be able to improve portfolio resilience, by identifying sustainability-related risks and opportunities in the portfolio and then taking steps to address these.

About the author:

Viacheslav Khobta is a regular contributor to Cyan Reef with passion towards disruptive technology themes. Viacheslav has a strong analytical background in asset pricing and fintech research. MSc in International Finance, University of Economics in Bratislava (SK), Kyiv-Mohyla Academy (UA), University of Bergen (NO).

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