ESG: is a rebalancing needed?

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.

Sources:
1 Gunnar Friede, Timo Busch & Alexander Bassen (2015) ESG and financial performance: aggregated evidence from more than 2000 empirical studies, Journal of Sustainable Finance & Investment.
2 MSCI Five Lessons for Investors from the COVID-19 Crisis Dimitris Melas, Roman Kouzmenko, Zoltan Nagy, Navneet Kumar May 2020.

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.

Performance based on index TR Net in USD.

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

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?

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.