Investments in companies and funds that factor in environmental, social and governance (ESG) criteria have fared relatively well during the coronavirus downturn, but is this a sign of things to come?
In the wake of the coronavirus, ESG investing has seen its fortunes rise. Worldwide, investors poured $45.6 billion into ESG funds in the first quarter of the year, compared to outflows of $384.7 billion for the overall fund universe, according to research firm Morningstar.
Stocks that benefited from people staying home, such as Netflix and Zoom Video, outperformed expectations in the past few months while retailers and airline companies among others, saw their stocks fall. But COVID-19 may well prove to be a major turning point for ESG investing as the pandemic alters society’s values.
Sustainable funds attracted record inflows in the first quarter amid the market turmoil, and many of these funds are outperforming the broader market for the year. “Prior to this crisis there was a meaningful and increasing focus on ESG investing and it is likely that this focus will only increase following the coronavirus,” Goldman Sachs said in a recent statement.
ESG investing, which evaluates a company’s environmental, social and governance ratings alongside traditional financial metrics, continues to grow. So far this year, US listed sustainable funds are seeing record inflows, despite the market turmoil. The United Nations Principles of Responsible Investment, which launched in 2006 with 100 signatories, now has more than 3,000 supporters, with a combined $100 trillion of assets under management.
The drive towards responsible investment is not just economic but societal. This, in turn, may put more pressure on the very large asset managers to align more of their assets under management with some sort of ESG or responsible investments approach.
Analysts and investors say that the pandemic will further prioritize investing with a conscience. But where once the “E” was arguably the most high-profile of the trio of considerations, a company’s social and governance attributes could become increasingly important as investors scrutinize corporations’ responses to the pandemic, as well as their viability looking forward.
“The rebound in civil society has been impressive, with an increase in volunteering, social cohesion, community support and focus on public good vs. private freedoms,” according to JPMorgan. “We see the COVID-19 crisis accelerating the trend towards ESG investment.”
“We expect increased investor focus on ESG considerations after COVID-19, with particular demand for greater corporate transparency and stakeholder accountability,” UBS also added in a recent note to clients. “The crisis underscores the relevance of ESG considerations to company performance and investment returns, and we expect that this will continue to influence corporate and investor actions going forward,” the firm said.
Before the pandemic, stakeholder capitalism – the idea that companies’ sole focus shouldn’t be deepening shareholder pockets – was growing in popularity. The pandemic will likely accelerate this shift, with investors rewarding companies that respond to the crisis by focusing on long-term goals, rather than prioritizing near-term profit at all costs.