2020 was a wild ride. Not only in our personal lives, but also for financial markets – and the commonly-held assumptions that go along with them.
Despite the April 2020 market meltdown (and recovery) caused by COVID-19, investors continue to flock toward funds and investing practices perceived to fall under the umbrella of “ESG”, also known as Environmental, Social and Governance driven-investing.
You might think that during a global crisis, the interest in making “good” investments would fall behind those perceived to be more profitable. But there’s a growing body of evidence3 that supports the opposite.
In the first four months of 2020, investors poured a record of at least $12.2 billion into funds that say they invest in environmental, social and governance practices, according to the Wall Street Journal1.
And according to CNBC, even bigger numbers abound. The outlet reports that sustainable investment firms just “surpassed 1 trillion for the first time on record7”
2020 has been described as a reckoning, and a year of awakening in the desire for greater social equity and inclusive growth.
A number of notable companies have recognized this trend, and have begun to divert greater attention and resources toward social justice and inclusivity, including many Fortune 100 clients.
Additionally, a host of other large name-brand companies, including Starbucks and Microsoft, are looking to go carbon-neutral by sometime in the mid-21st century.
All of which creates an auspicious climate for ESG investors, who are hoping to align their values with risk-adjusted returns. Read on to learn about more trends – and see how this relates to you!
WHAT IS ESG:
First, let’s tackle the question of, “What is ESG?”
ESG investing is a surging category of investment methods that combine environmental, social and governance factors in traditional investment evaluations.
Often, you might hear “ESG” used alongside the term “Socially Responsible Investing”. While the two are similar, they are not interchangeable. Keep up with our Signet blog to learn more about SRI!
Accounting for environmental, social and governance (ESG) factors typically involves using screens or filters that investors can use to exclude companies and industries that don’t meet their value criteria.
Here’s how the E, S and G break down:
Environmental – The environmental aspect relates to a number of elements indicative of a company’s impact on the Earth – in both positive and negative ways.
When looking at the environmental impact of a company, ESG-savvy investors tend to examine things like its climate change politics, greenhouse gas emissions goals, carbon footprint metrics2, water-related issues and goals, and the usage of renewable energy, including wind and solar.
Social – The social element of ESG investing is typically based of people-related criteria, such as its company culture, and anything that impacts its employees, consumers, customers or suppliers.
Topics to consider when looking into companies include their approach to employee treatment and retention, which includes pay, benefits, perks, training, and development, as well as diversity and inclusion initiatives, consumer friendliness, supply chain sourcing and any public stances on social justice issues.
Governance – The governance component of ESG investing relates to its corporate structure, company oversight and
Topics to look into include executive compensation (including bonuses and perks), diversity of the board and management teams, compensation tied to metrics that drive long-term business value (as opposed to short-term EPS growth), majority vs. plurality voting for directors, transparency in communicating with shareholders, and its history with the U.S. Securities and Exchange Commission (SEC) and other regulatory bodies.
MACROTRENDS IN ESG IN 2020:
As the world continues to deal with fallout from COVID-19, the ‘experts’ have spoken – not everything in our lives has been disrupted; some things were just moved forward 10 years.
For all the tragedy and loss of life, there have also been a number of commendable advances in industry. Telehealth, for instance, was touted as having been pushed up a decade. Companies are now re-examining their real-estate strategies, figuring out how to accommodate workers remotely, and work within reduced office floor plans.
Combined with the resulting reduction in travel, global energy demand has plunged this year4, while careers in the solar and wind industries are among the fastest-growing jobs5 in America.
So, as the dust settles on the pandemic, many investors might turn to ‘green’ types of investments – not only because of prevailing ‘green’ winds, but also because there will be a post-pandemic focus on risk reduction, especially in respect to financial/geopolitical risks related to the threats of climate change and inequality.
“Greater premiums will be placed on business stability and resilience as companies brace themselves for inevitable black swans”, says Pitchbook6, a private market data company.
The companies who work to solve these ‘big picture issues’ will be at the forefront of visibility in the digital economy. And new opportunities in fields such as energy efficiency, green infrastructure, waste management, water solutions, biotech, health and wellness and more will swell, as governments pay closer attention.
MICROTRENDS IN ESG:
Still curious about ESG in a post-COVID world? Here are some tidbits on some microtrends.
-Recent studies have proven ESG investing to not only be relatively high-performing, but also just plain popular. Millennial and Gen Z investors tend to favor investments in companies they perceive to be ‘good global citizens’.
-There’s a general consensus that “treating workers right’ is also good business. And the aforementioned investor groups are flocking toward buying stock in companies that receive high marks from their employees.
-Recent studies on corporate governance have observed that “improved governance can enhance long-term shareholder returns”. Improved transparency, accountability and increased communication with shareholders have all been observed in well-run companies.
HOW SIGNET CAN HELP:
It is our mission to provide investment resources and strategies to clients and financial institutions helping them develop a greater knowledge and passion for sustainable, responsible and impact investments.
Let us help you find your mark with our experience.
Source 1.)“ESG Investing Shines in Market Turmoil, With Help From Big Tech” – Wall Street Journal, 5.2.2020
Source 2.) “MSCI index carbon footprint metrics” – MSCI
Source 3.) “2020 – What does the global pandemic teach us about ESG investing?” – ETF Express, 8.13.2020
Source 4.) “Global energy demand to plunge this year as a result of the biggest shock since the Second World War.” – IEA.org
Source 5.) “Get Ready To Earn Big: America’s Highest-Paying Jobs In 2020, Ranked”
Source 6.) “Post-pandemic focus on risk reduction means good news for ESG investing” – CorporateKnights.com
Source 7.) “Sustainable investment funds just surpassed $1 trillion for the first time on record” – CNBC
All investing involves risk including loss of principal. No strategy assures success or protects against loss.