COMMENT Over the past half decade we have seen a remarkable rise in environmental, social and governance criteria. The ESG investment market has an estimated $30tn (£24tn) in AUM, accounts for around one-third of all professionally managed assets around the world, and since 2015 more than 1,000 funds that focus on ESG investment principles have opened. Most now find themselves in uncharted territory as markets crash.
That said, the outlook is encouraging. In the past couple of months, we have seen headlines telling us ESG investment funds are outperforming the wider market. I think this outperformance results from socially responsible investments that have screened out fossil fuel companies, which have plunged in value as oil prices have fallen. At the same time, they tend to be underexposed to heavy polluting companies such as cruise line operators and airlines. Managers of sustainable funds have long said that they can use ESG factors to limit risks in their portfolios.
One last stat to throw at you: global finance firm Morningstar says investors in ESG funds haven’t been scared away by the market slump, at least not yet. In the first quarter of 2020, global net inflows into exchange-traded ESG funds were reported at $45.6bn, up by 90% on the first quarter of 2019.
Changing course
So ESG funds seem to be weathering the storm, and I believe the recent boom we have seen is set to continue.
Looking at environment first, there are two key points to make. First, this crisis has its origins in biodiversity loss, rapid urbanisation, rising population levels and as humans come into closer contact with animals through deforestation and bushmeat markets.
Each year we see new topics rise to the top of the ever-expanding sustainability agenda. Following the social and economic loss we have seen from this coronavirus crisis, biodiversity may become centre stage with an accelerated focus on nature-based solutions. A global failure to act on this factor risks future epidemics as diseases continue to spread between animals and humans.
Second, climate change represents more of a danger to human life than this pandemic has presented and must be a challenge we look to face as we return to a new normal. The reduction in pollution we have seen during this crisis has given me hope that we can change course if we decide we want to.
The social impact aspect has proven particularly important during the throes of this pandemic. We have lived through decades of social complacency and now have cohesion of 7bn people around the world. It is our local shops and communities that we are relying on, and our public health service.
As a result of this pandemic, individuals, consumers and employees are more aware than ever of the human cost, social-economic gaps and deprivation that exists across our nation and the world. In turn, we are now more aware than ever that now is the time to be socially responsible.
The ultimate test
Finally, company governance responses can help or hinder a business reputation. This crisis has proved the ultimate test for companies’ boards and management.
More than just governance, exceptional times call for exceptional leadership. Think about the thousands of end consumers who have been threatening to boycott chains including Wetherspoons, Sports Direct and Topshop for refusing to pay their staff, or for remaining open amid ambiguity regarding what is classed as an “essential business”.
How companies act right now is under scrutiny, and so to take a back seat on ESG commitments as things begin to get back to a level of normality could prove to be very challenging indeed.
In my opinion, it is clear that ESG was already on the agenda for many investors and insurers. This crisis has shown that ESG funds do perform, and indeed can, and have, outperformed.
The need for each of the E, S and G factors to be considered globally by individuals, consumers and employees has been brought front, line and centre.
Surely investors and tenants will only respond in one way – and that will be to elevate the importance of ESG within investments and decision-making.
Julie Townsend is head of environmental consultancy at CBRE
