What COVID-19 Teaches Us About ESG Investing
As we near the end of the first half of 2020, the world is adapting to the new normal under COVID-19. For the finance community, as well as for consumers more broadly, this has come with increased scrutiny of how companies are reacting to unprecedented market uncertainty.
Needless to say, the pandemic presents unique challenges for public equities markets and those invested in them. In a new report from communications firm Edelman, based on interviews with 12,000 people in several countries, 71% of respondents said that if during this time they perceive that a company is putting profit over people, they will “lose trust in that brand forever."
The reverse also appears to be true. Investors have realized, in particular, that companies with proven commitment to their social and governance metrics are not only being recognized for stepping up to the monumental challenge to community health, safety, and wellbeing presented by the crisis — they are also proving themselves among the best prepared for market shocks, such as those presented by COVID-19.
Indeed, Morningstar found that for the first quarter of 2020, 24 out of the 26 ESG index funds the firm tracks (US, global, emerging markets) outperformed their closest conventional counterparts. Of 206 sustainable equity and ETF funds in the US, 44% ranked in the top quartile, 70% in the top two and only 11% in the lowest quartile (based on year-to-date performance net of expenses). The resilience of ESG investments through the crisis is similarly being reported by firms like BlackRock, MSCI, DWS, and Bloomberg, among others.
While some argue that ESG’s current COVID-19 performance is driven by the sector’s low exposure to fossil fuels at a particularly vulnerable moment for that industry, historical trends bear out a more structural explanation for ESG’s resilience during downturns. In the early stages of the 2008 financial crisis, for example, the MSCI ESG Leaders Index also outperformed the broader market and has continued to do so on average since 2007 on one-, three-, five-, and 10-year timeframes.
“ESG funds tend to be biased towards higher quality companies with a stronger balance sheet, companies that are run better and operate more efficiently.”
– Hortense Bioy, Director of Passive Strategies and Sustainability Research, Morningstar Europe (as reported in Financial Times, April 2020)
For those that realized the ESG opportunity early on, the current pandemic serves primarily as validation of their strategic focus on what fundamentally makes a sustainable investment portfolio. For others, ESG’s historical and current performance in the pandemic offers a silver lining; as ESG is expected to become a mainstream feature of modern investing, the present always presents an opportunity to be proactive.