The coronavirus pandemic has laid bare the problems with how many businesses operate: from inadequate sick leave policies and poor working conditions to continued attempts to duck environmental commitments. Amid the chaos of COVID-19, companies are revealing their true colors — a slew of them indulging in bad business practices, while some try to do the right thing ― and investors are paying attention.
As the stock market reels from the economic effects of the coronavirus, a type of ethical investing called ESG is emerging as a financial bright spot.
ESG means assessing companies on environmental, social and governance factors before deciding whether to invest in them. These factors include corporations’ environmental standards, such as water conservation and greenhouse gas reductions; employee pay and benefits; policies related to health, safety and sexual harassment; workforce and leadership diversity; and executive compensation guidelines (think: no golden parachutes), to name just a few.
In the coronavirus age, issues like paid sick leave, fair wages, employee treatment and sustainable supply chains take on a new, urgent cast.
Headlines from The Wall Street Journal to Bloomberg, the Financial Times and more trumpet the outstanding performance of ESG investments as a surprising silver lining to the pandemic, with the potential to impel corporate America to put a meaningful focus on accountability and sustainability.
Before the pandemic sent worldwide financial markets into a tailspin, Nigel Green, chief executive and founder of deVere Group, one of the world’s largest independent financial advisories, proclaimed in February that ESG investing “will be the new norm in less than five years” and is “the trend that will define the 2020s.”
It’s a sign of the times. “There’s much greater cognizance these days that corporations play a huge role in social and environmental issues that can no longer be ignored,” said Justin Conway, vice president for investment partnerships at Calvert Impact Capital, a nonprofit investment firm that works to generate profits for investors by funding development projects in underserved communities around the world. “Just as what we choose to buy as consumers matters, so does how we choose to invest.”
Just as what we choose to buy as consumers matters, so does how we choose to invest.
Justin Conway, vice president for investment partnerships at Calvert Impact Capital
Conway contends that burgeoning awareness of social inequality issues and the climate crisis has brought industries worldwide to an inflection point. Companies are realizing that consumers and investors are going to hold them accountable for their actions. Consider the fact that BlackRock, the world’s biggest asset manager with $7 trillion under management, announced in January its plan to divest $500 million from coal-related businesses. In March, the company listed environmental disclosures, corporate culture, and diversity and inclusion among its investment priorities for 2020.
“ESG investing is ultimately about improving corporate performance financially, as well as environmentally and socially,” Conway said. “It’s becoming mainstream because it’s a smarter way of investing that lets you evaluate a company’s overall performance through additional lenses” — by looking not just at whether the company does well, but whether it does good, too. As investors zero in on corporate responsibility, companies are increasingly embracing the idea that improving on ESG measures can also improve their bottom line.
Financial professionals have considered E, S and G factors for decades, Conway said. After the acronym came into use 15 years ago, ESG garnered broader attention, and in the last several years its momentum has snowballed dramatically. Some of that growth comes from individuals buying stock in companies that espouse their values, often with help from money managers who specialize in ESG.
When Andrew Smith, a Brooklyn-based filmmaker whose work focuses on people’s interactions with natural and urban environments, started getting seriously involved with environmental activism in New York City, he decided to take a closer look at the stock portfolio his grandfather had given him many years before.
“I realized I couldn’t be out in the street protesting Chevron and Shell when I owned shares in these kinds of companies,” said Smith, who asked to use a pseudonym to discuss his personal finances. He first turned to his family’s longtime financial advisor, but didn’t feel he was taking his concerns seriously. His research led him to Gary Matthews of<a href=”https://www.sriinvesting.com/”> SRI Investing</a>, who helped him buy into sectors like renewable energy, and companies with strong track records of positive corporate governance.
“I think some people still believe this approach to investing isn’t real — that it’s a fringe, solely ideologically-driven practice,” said Smith. “But it works, and also offers a way to personally help drive positive societal change.”
As both individuals and institutions increasingly demand some level of ESG analysis in their investment decisions, asset managers are responding with a growing number of ESG products, such as mutual funds whose holdings include companies that successfully implement ESG principles.
According to the Global Sustainable Investment Alliance, ESG investing grew to over $30 trillion in 2018. Morningstar data reveals that $20.6 billion in total new assets flowed into ESG-focused mutual and exchange-traded funds in the U.S. in 2019 — a nearly fourfold increase over the year before. Bank of America Merrill Lynch predicts that another $20 trillion is set to flow into ESG funds over the next two decades, calling the expected infusion a “tsunami of assets.”
Although there’s still some reluctance to buy into ESG — only 15% of hedge funds have incorporated ESG in their investment strategies, for example — the numbers demonstrate that investing with a conscience doesn’t mean sacrificing performance. The two largest ESG funds in the U.S., Parnassus Core Equity and the Vanguard FTSE Social Index, ended 2019 up 31% and 34%, respectively, according to Morningstar Direct.
In the midst of the current coronavirus crisis, ESG funds are beating the market, outperforming conventional funds In March. Year to date, the average ESG fund has fallen about 12%, half the decrease seen by the S&P 500 Index over the same period.
Investors are focusing on how companies treat their employees during the pandemic, and retooling their visions for how to create a more sustainable future as we witness a compendium of societal failings. This dovetails with the plummet in oil prices, which environmental news site Grist points out, leaves ESG funds that aren’t invested in fossil fuels better positioned to “weather the storm.”
At the end of March, Green, of deVere Group, predicted that “the coronavirus pandemic will trigger a ‘skyward surge’ in sustainable, responsible and impactful investing,” saying that it “has underscored the vulnerability and fragility of societies and the planet.”
“ESG investing was already going to reshape the investment landscape in this new decade — but the coronavirus will quicken the pace of this reshaping,” he said.
We’re all impact investors. Every investment has impact, positive or negative.
Jennifer Kenning, CEO and cofounder of Align Impact
It should come as no surprise that millennials — who number nearly 80 million in the U.S. alone — are emerging as leaders of the ESG trend. A recent survey of millennials worldwide conducted by the deVere Group found that some 77% of them point to ESG concerns as their top priority when considering investment opportunities. Furthermore, a 2019 Morgan Stanley investment survey of high net worth investors revealed that 95% of millennials are interested in sustainable investing.
Households headed by millennials now earn more than young adult households did at nearly any time during the last 50 years. And with the coming “Great Wealth Transfer,” it’s estimated that as much as $68 trillion will pass from baby boomers to millennials over the next couple of decades.
Millennials are also playing a key role in the impact investing market, a burgeoning offshoot of ESG that estimated at some $500 billion globally. Beyond investing themselves, young people from wealthy families are bringing in consultants to help educate older generations on how to invest in a way that favors sustainability.
“When we’re talking to millennials’ parents or grandparents, we need to speak in their language,” says Jennifer Kenning, CEO and cofounder of Align Impact, an advisory firm that helps ultra-high-net-worth clients make profitable, mission-driven investments. “I tend not to use terms like ‘impact’ and ‘ESG,’ especially when they’re skeptical. Instead I focus on the economic and financial opportunities presented by investing this way.”
While ESG zeroes in on how a company operates, impact investing focuses on creating solutions to a particular challenge — for instance, buying bonds that finance affordable housing, renewable energy, or clean water in an emerging market. The key is that you can trace how your money will be spent, to make sure it’s supporting causes you feel good about.
“Are you financing charter schools or private prisons? Are you investing in solar and renewable energy in your local municipality, or are you financing old utilities that still use coal? These are questions that everyone can understand,” Kenning said.
Aside from investing directly in ESG funds, Conway advises people ask for ESG options within employers’ 401(k) retirement plans.
Kenning also suggests taking a closer look at your bank. If you’re an environmentalist, for example, you might want to research whether your money is with one of the big global banks that are still funding fossil fuels.
“We’re all impact investors,” she said. “Every investment has impact, positive or negative.”
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