ESG: is a rebalancing needed?

The crisis has seen a rise in interest in ESG investing, shining the spotlight on the role good business plays in society. We analyse the implications of COVID-19 for the economy and society, through the lens of sustainability.

23 Jun 2020

4 min read

Michael Baldinger

Head of Sustainable and Impact Investing

Bruno Bertocci

Head of the Global Sustainable Equities team

Q&A with Michael Baldinger, Head of Sustainable and Impact Investing

I’m confident that in the aftermath of the COVID-19 crisis the sustainable investing (SI) trend will accelerate faster still. Over the last few years, we have already witnessed a remarkable transformation in the way the world’s largest asset owners are allocating capital and their focus on sustainability issues. I believe the pandemic will intensify this trend as markets acknowledge ESG factors as critical elements of investment research which they can’t afford to ignore. Going forward, investors will likely have even less tolerance for bad corporate citizens – funding those businesses will become expensive and capital could prove scarce.

We’ve already got ample evidence showing better managed companies tend to score well across ESG criteria, and that they outperform the market over the longer term1. We’ve seen ESG indices, such as the MSCI SRI global and ACWI indices, outperform their traditional counterparts by 10% over the past three and five years. Based on initial indicators over the past few months2, the companies held by sustainable investors have seen a surge in demand.

Evidence suggests that environmental threats sit at the heart of this pandemic. Biodiversity loss and the degradation of natural habitats are contributing to the rise of zoonotic diseases, such as COVID-19, which jump the animal/ human barrier. These same factors are also key contributors to climate change, a far-reaching existential threat which still demands urgent action.

Relative performance (in bps) of ESG indices vs. MSCI World parent index

Performance based on index TR Net in USD.

Source: MSCI Inc., UBS Asset Management, data as of 8 June 2020.

The relative resilience of ESG funds with higher ratings in the COVID-10 induced downturn 

But the pandemic has shone a light on the equally crucial roles of the society and governance. The importance of human capital in some of our most critical corporate sectors, like health, food supply and retail, has become crystal clear, as has good corporate conduct. How effective are a company’s emergency and business continuity plans when problems strike? How rigorous are their processes, and how motivated are their employees to support the company through difficult times? Can the company protect existing markets and pivot to new priorities and opportunities?

For decades, sustainable investors have had these issues on their radar: Now they’re on the radar for everyone and I believe they will grow even further in importance after the crisis.

The current situation should bring about significant change and will likely demand alterations in the way we approach the integration of ESG data into our sustainability strategies. The recent focus on environmental factors might, in the short term at least, need to give way to a greater emphasis on social factors, but long term, we may well see a more equal weighting between the E, S and G.

The current situation should bring about significant change and will likely demand alterations in the way we approach the integration of ESG data into our sustainability strategies.

Q&A with Bruno Bertocci, Head of the Global Sustainable Equities Team

Any business model, no matter what sector, that puts people in close contact will have to change, including restaurants, airlines, cruise ships, theme parks, movie theatres and many more. That said, humans are adaptable and clever so there will be solutions to these problems.

Perhaps the biggest change has been the incredibly effective shift to working from home and we have seen this positive impact inside our own company. With strong IT and support it is possible to be just as productive and connected from home as we were in the office. We also feel safe by not having to commute, and we can manage our own schedules more flexibly. Some companies have already said that their employees are likely to work from home at least until to year-end, or longer. We believe this could easily be a permanent trend, freeing up many millions of square feet of office space. That in itself will have long-lasting implications for the real estate sector and in particular office occupancy.

Any business model, no matter what sector, that puts people in close contact will have to change.

I believe so, and of course a company has to make money to stay in business. But a company without strategic direction or one that does not care for its employees or the society and the environment around it won’t succeed either. Employees are reluctant to come to work if they don’t feel safe. They may not change jobs now but they will in the future, if they can find a more inspiring opportunity.

Without a healthy, vibrant society and a healthy environment, economic growth will be low and opportunities limited. The COVID-19 crisis has also helped shine a light on the social purpose of asset management not only to safeguard and grow our clients’ assets but to vigorously represent them to make the companies in which we invest more responsible, better managed and more successful. That is the power of engagement that we are seeing today and it ties in very well with the long-term purpose of companies; to contribute to the world in a meaningful way.