Is COVID-19 the end of Responsible Investing?

Over the past few years Responsible Investing, often known as (Environmental, Social and Governance (ESG), has surged in popularity, with more investors wishing to influence positive change with their money. The wider investment industry came to understand that more responsible companies are likely to still be trading in the long-term. However, for every trend there are critics.

Kate Capocci

Published: 30 Apr 2020 Updated: 13 Apr 2023

Over the past few years Responsible Investing, often known as Environmental, Social and Governance (ESG), has surged in popularity, with more investors wishing to influence positive change with their money. The wider investment industry came to understand that more responsible companies are likely to still be trading in the long-term. However, for every trend there are critics. Their most common refrain is that people only want to invest responsibly during bull markets. So now we’ve entered into our first bear market in over a decade, is the rise in responsible investment over?

Responsible investing has grown, not only from a desire to keep investments in line with one’s values, but also from investors trying to future-proof portfolios in a rapidly changing world. There is growing awareness of the impact corporations can have on societies and the environment and how this needs to adapt going forwards. More sustainable companies tend to be more resilient with more conservative balance sheets, fewer controversies, good stakeholder relationships. They often play an active role in adapting and mitigating societal challenges which is likely to be rewarded through future policy and legislation.

Responsible investment has gone from being ‘nice to have’ to something you need to have in a long-term investment portfolio.

Aside from the theoretical explanations behind the undeterred rise in responsible investments, this most recent drop in markets has shown that these kinds of investments have continued to outperform during falling markets.

As reported in the Financial Times, 62% of Environmental, Social and Governance (ESG)-focused large-cap equity funds outperformed the MSCI World Tracker over March 2020. [1]

There is a significant caveat we should add here. While many of these ESG-focused funds may use a best-in-class non-exclusionary approach, many will naturally tend to screen out Oil & Gas, Airlines and Miners. Alongside the inevitable fall in demand for these companies, a concurrent oil-price war between Saudi Arabia and Russia began, sending oil future prices into the red.

But this does not mean responsibility-based outperformance was purely down to sectoral biases. At Smith & Williamson we have created, using a set of quantitative tools and qualitative assessments, a list of responsible companies. These companies have positive products or services, have good relations with all stakeholders and strong management. Perhaps surprisingly, this condensed list includes an airline, Oil & Gas companies and Mining companies.

And this list outperformed our wider monitored universe by 15.1% over the first three months of 2020. [2]

The future is also looking bright for ESG investors. During a recession, carbon emissions fall year on year due to reduced economic activity. Normally when we emerge from these recessions, governments inject liquidity into the economy to stimulate recovery. In many cases this means large infrastructure projects, factory production starting up again and people regaining employment, all of which pushes emissions back up. [3] So far in 2020, worldwide promised stimulus packages total over USD 8 trillion. [4]

But the world has changed and limiting global carbon emissions has become essential, pandemic or no pandemic. Dr Fatih Birol, executive director of the International Energy Association has urged governments to put clean energy at the heart of their stimulus plans. [5]

This has been echoed by the President of the European Commission, Ursula von der Leyen, who has said that “the money in our next budget must be invested in a smart and sustainable manner”.

She added that “crucially we need to invest strategically in our future, for example for innovative research, for digital infrastructure, for clean energy, for a smart circular economy, for transport systems of the future. A Marshall Plan of this nature will help build a more modern, sustainable and resilient Europe.” [6]

The possibility of even a portion of global stimulus packages going towards clean energy and sustainability could mean huge advances for the low carbon transition and for environmentally responsible investments. It could mean a shift in our corporate eco-system, with companies that have already been preparing for a leaner, greener world reaping the benefits.

Another key shift as a result of the COVID-19 pandemic could be the way governments and societies view the gig economy. Many workers on temporary or zero-hour contracts will have been most hit by the current lockdown. Many have a hand-to-mouth existence and have now found themselves without a job, relying on government benefits (where they exist). If they keep their job, they are more likely to work if they feel unwell because they cannot afford not to.

For these reasons, the gig economy may come under further scrutiny going forwards. Corporations will also be weighed and measured over their handling of the crisis. Many will have to furlough or let go of staff just to weather the stall in economic activity. But making your lowest paid staff redundant while still issuing full executive pay packages will not go down well with the public. For many companies, their reputation is on the line.

Responsible investors should also be taking note because more stable workplaces, with strong labour management tend to have lower turnover and higher productivity. Employees who know that their job could fall out from beneath them at any moment will hardly be encouraged to do their best work.

COVID-19 has been an interesting test of the defensive nature of responsible companies and of responsible investments. They have proved resilient, outperforming the wider market throughout the economic downturn. And there is evidence that this crisis is helping to focus minds on investing in a more sustainable future.

So, in answer to the question “is the rise in responsible investment over?”

No. It has only just begun.

References

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

Please remember investment involves risk. The value of investments and the income from them can fall as well as rise and investors may not receive back the original amount invested. Past performance is not a guide to future performance.

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