ESG: A Paradigm for Resilience

To assert that the global COVID-19 pandemic has affected almost every part of our daily lives in 2020 would be an understatement. As the one-year anniversary of the virus’s outbreak approaches, it is becoming clear that some adaptations and trends necessitated by the pandemic are likely to have lasting impacts. For instance, the rise in flexible and home-based working arrangements has forced the commercial real estate market to pivot. And the expansion of voting methods, which resulted in a record turnout in the 2020 US presidential election, has fundamentally changed electoral politics.

Likewise, COVID-19’s enormous effect on the economy, which sent the country into a recession different
in scope and impact from any we had seen before, has compelled investors to look at their holdings in a new light. What investment strategies are resilient enough to withstand the massive changes 2020 brought? What businesses are recovering quickly from the shocks of COVID-19 and even thriving?

ESG (environmental, social, and governance) investing had a record year in 2019, with sustainable funds
seeing a fourfold increase in inflows over the previous year, resulting in $20.6 billion of new money in this quickly growing sector. Many questioned whether the uncertainty generated by the pandemic would drive investors back into more mainstream investments that focus solely on the financial bottom line. However, the opposite proved true; investors were interested in taking advantage of the more holistic, nuanced approach of ESG funds, which evaluate a company’s social and environmental impacts, along with internal practices and policies.

In the first three quarters of 2020, ESG funds saw inflows of $30.7 billion, exceeding the previous year’s record with three months to spare. And these funds have rewarded investors’ faith in them during this difficult year, with nine of the ten largest US ESG index funds outperforming the S&P 500 in the first half of 2020.

While it’s tempting to attribute the success of ESG funds this year to the April collapse in oil demand, this is not the only explanation. One aspect of ESG investing that investors are seizing on is that the sector’s resilience in the face of COVID-19 may be an indicator of a similar response to the long-term,
multi-layered challenges posed by climate change impacts. In a recent J.P. Morgan poll of institutional investors, 71% of respondents indicated that it was likely that COVID-19 would increase awareness of and efforts to combat the higher probability risks posed by climate change and biodiversity loss. “As action and awareness of long-term sustainability risks are likely to increase in the longer run in the aftermath of the COVID-19 crisis, this should be a positive catalyst for ESG,” says the associated report.

Another probable reason for ESG investing’s continued advances during COVID-19 is the social component: evaluations of supply chain management, handling of labor relations and disputes, safety policies, and more. Although ESG investing is best known for its environmental component, 2020 was a year when companies’ treatment of their employees and contractors attracted outsized attention. To many investors, it makes sense that businesses that rank well in the social category of ESG metrics may be better positioned to meet the challenges of a global pandemic.

As we move into a new year, the world’s response to COVID-19 has changed. Vaccines are being administered globally, many schools and workplaces have overhauled operations to reopen, and in much of the world mask-wearing has become a fact of life. Our immediate pandemic future remains unknown, making any sort of predictions regarding the economy and investing landscape even more difficult than usual. What is certain: ESG investing entered 2020 with great momentum, and many investors have appreciated the approach in this year of tumult. With the ESG sector’s sound fundamentals and deep attention to complex types of risk, it should continue to gain new support in 2021 and well beyond.

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Kirbie Crowe

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