A number of large investors say the COVID-19 pandemic will be a watershed moment for sustainable investing.
Asset managers including DWS and Aviva Investors argue the pandemic will prompt investors and regulators to increase scrutiny of companies’ governance and social behavior. Others also describe a strong link between the health crisis and awareness of environmental issues. At a recent Reuters Events survey, 74% of respondents said the COVID-19 outbreak has hastened the adoption of environmental, social and governance (ESG) into mainstream investment policy.
Should the novel coronavirus create impetus on sustainable investing, it will come to intensify a trend that was already advancing at full speed, with assets under management outperforming the broader market in recent years. The nature of the pandemic has alerted public opinion to the globalization of risks and to the importance of cohesive responses, all drivers of ESG principles, investors say.
“For many businesses, the health crisis has been the most difficult stress test in their history, as they have had to deal with an unexpected, exogenous threat that caused operational disruption and severely increased risk,” said Willem Keogh, Head of ESG and Thematic Solutions at Qontigo.1 “This is exactly what ESG attempts to do: to better manage this sort of shocks. Boardrooms and investors are more likely to increase emphasis on factors that lead to relatively enhanced results under such circumstances.”
Link between corporate behavior and business performance
For many, the health crisis will come to accelerate specific trends that are at the heart of ESG.
In a report this month,2 UBS Global Wealth Management singled out five sustainability trends it sees growing as a direct effect of the virus situation. These are: increased investor focus on ESG considerations, with particular demand for greater corporate transparency and stakeholder accountability; elevated importance of the social factor for companies and investors; awareness of environment-related opportunities; structural embedding of sustainable investing; and awareness of the performance benefits of sustainable portfolios during volatile times.
“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,” UBS wrote in the report. “Consequently, we expect to see the growth in sustainable-investing assets under management of recent years to continue even in a very different economic environment.”
If corporate governance has become a key issue in this crisis, companies’ social standing, including healthcare support, employee working arrangements, community relations and human rights, is perhaps what will be placed under the spotlight most eagerly.
“A lot of investors and a lot of people in society broadly will look at how companies are responding, how they are supporting employees through this crisis, how they are supporting their customers,” said Roelfien Kuijpers, Head of Responsible Investments and Strategic Relationships at DWS,3 “and these issues will have great implication for companies’ reputation and long-term performance.”
The environmental side
Possibly less evident but equally powerful may be the link between COVID-19 and the environment. Firstly, the virus has underscored the potentially devastating effects of humans’ interactions with their surroundings. Secondly, strong government and community reaction to the health crisis has shown societies’ possibilities to affect global issues.
“COVID-19 has thrown new light on the interdependencies in human and natural ecosystems, and the vulnerabilities of a closely networked world,” Aviva Investors wrote in a report.4
“It is impossible to look at the global health crisis and its knock-on effects, without considering ESG factors,” the report said. “For example, if we can drastically change our behavior to fight a viral pandemic, can we also do so to avert a climate disaster?”
Aviva’s report said COVID-19 shows how a health and environmental issue can cause material governance challenges for companies and countries. It also explored the possibility that the virus may be the result of “the relentless incursion of human systems into the remaining natural world,” much like we do with our ecosystem, only this time with our ever-closer contact with wild animals.
Among other predictions, investors say we are likely to see increased regulatory demands for companies to incorporate ESG criteria. Additional economic stimuli may also include ‘green’ requirements or have an emphasis on sustainable activities to incentivize businesses to be better prepared for a future crisis.
Pressure regarding sustainable principles
As dramatic as the recent events have been, Kuijpers of DWS says a positive lesson can be drawn, one in which the asset-management industry will play a central role.
“ESG investing was already a very fast-growing trend over the past three years but I do think that this pandemic is showing the importance of the planet, of the wellbeing and health of people, and that asset owners and assets managers will be under pressure from their clients and from their constituencies to expand the array of sustainable investment options,” she said.
1 Qontigo’s STOXX division provides a wide menu of ESG and low-carbon indices designed to cover different sustainable investment goals. The ESG solutions include exclusions-based strategies that track flagship benchmarks minus companies in contravention of global norms or involved in controversial activities, and strategies that combine negative exclusions with positive ESG integration into stock selection.
2 UBS Chief Investment Officer GWM, ‘Sustainable investing after COVID-19,’ May 12, 2020.
3 ‘DWS ESG TALKS: Will Covid-19 unravel or accelerate ESG investing?’ Apr. 23, 2020.
4 Aviva Investors, ‘Will COVID-19 prove a watershed for ESG?’ May 12, 2020.