More than eight months into the Corona pandemic, the number of cases has topped 25 million worldwide and the growth of the global economy deteriorated as shutdowns, to contain the spread of the virus, halts economic activity. In addition, financial markets also reacted heavily, with some markets having lows of -30%. Consequently, both policymakers and investors perceive this pandemic as a wake-up call that accelerates the need for a sustainable approach to investing, since a parallel can be drawn between the unforeseen risks of a pandemic and other environmental issues, such as climate change.
One approach that has been gaining ground in the past few years is ESG investing, as investors have increasingly shifted their attention to the impact that environmental (E), social (S) and governance (G) factors have on asset returns. The observed momentum in ESG investing is remarkable. What used to be a niche, ESG investing is growing in every geography and asset class. More and more investment processes, products and active ownership practices are integrating the principles of ESG investing. To illustrate the growth: asset under management in ESG ETFs have doubled to 80 billion dollars in the past year. Below, I also show the monthly flows into ESG equity funds compared to other equity funds. We can observe a clear and stable growth in this submarket, during the past three year. Another, more specific, example is the growth of iShares’ ESG MSCI USA ETF (ESGU). This fund launched in 2016, and saw its asset under management increase by more than a 30-year, last year.
Covid-19 may prove to be a catalyst that will hype ESG investing even further. How likely is it that this area of investing will be growing in the next years? J.P. Morgan recently survey investors from 50 global institutions, which jointly have almost 13 trillion dollar assets under management (AuM), on how they expect Covid-19 to impact the future of ESG investing. Approximately, 71% of the respondents indicated that it was “rather likely”, “likely” or “very likely” that an low probability event such as Covid-19 would increase the global awareness to tackle high impact and probable risks, such as climate change.
J.P. Morgan also asked the respondents : “In your view, what will be the implications of the COVID-19 crisis for ESG investment momentum in the next 3 years?” The results are shown below:
As the awareness of sustainability risks are likely to increase in the aftermath of this pandemic, Covid-19 is expected to be a positive catalyst for the ESG investment approach. This opinion was shared by the majority of the respondents of the J.P. Morgan survey (55%), who consider Covid-19 as a positive catalyst for the coming three years. Only 27% of the investors expect a negative impact, while 18% believe it will be neutral.
An important reason why ESG investing is expected to rise, I believe, is that the pandemic puts the role that good businesses have in society under the limelight. It is a reminder that firms are a part of a bigger system, and that we have to think about others as well. Investors can directly reflect this through investing in a socially responsible way. There has been much discussion about how firms react to the pandemic. There are several examples and cases of good and bad practices, highlighting that firms are part of our society. For example, there are examples of shops that have been kept open, even though a ban on non-essential retail was in place for some countries. There were also companies that have been praised for how they treated their staff during the pandemic, or companies that cut down on executive pay. Companies are more and more expected to do good, while generating profit.
In another poll of UK independent financial advisers, conducted by Federated Hermes, more than 3 out of 4 respondents believe that investors would be motivated to divest from companies that failed to support their employees, or society in general, throughout the crisis. Another finding was that 85% of the UK independent financial advisers had seen a rising demand from their clients to allocate capital to ESG-integrated funds since the start of the Covid-19 outbreak. The latter survey-based finding is supported by market data. While investor fled away from mainstream funds during the March sell-off, ESG funds (in the UK) actually had a net inflow, according to Morningstar. Investors piled a net £2.9bn into ESG investment funds during the first quarter of 2020. Across Europe, sustainable funds pulled in €30bn in the first three months of 2020, compared with outflows of €148bn across European-based funds overall. Redemptions of €3.9bn from ESG funds in March turned into inflows of almost €12bn in April, the data show. It seems to be quite clear: the pandemic only made ESG investing even more appealing.