“I think I’ve seen this film before/So I’m leavin’ out the side door” – so said Taylor Swift in her song Exile on her platinum album Folklore. The overriding lament is that people’s behaviour never changes. But when it comes to investing, we do not agree with Ms Swift – we are much more optimistic about this past year. It has changed investor behaviour and how markets operate. Here are four examples.
Reason 1: ESG has passed the Covid-19 stress test. In 2020, around 40% of ESG funds were top quartile (this is finance speak meaning they performed much better than their non- ESG peers) and that was rewarded with over $120bn inflows into ESG equity strategies (more finance speak, meaning they were popular and investors put their money in). Just to give you a comparison, there were $125bn of outflows from non-ESG equity strategies.
Reason 2: The ‘S’ in ESG climbed into the front seat with the ‘E’. There is no doubt that 2020 brought more widespread focus on our health and education, both at an individual and collective level. Coronavirus brought it home to everyone, as hospitals filled and schools and colleges shut their doors. When you combine this with the proliferation of social media and overlay everyone’s personal experiences, you create a situation where investors understand that companies that help us eat better food, work out regularly, provide sound educational tools and off er medical care to more people are going to be very important economic actors.
Reason 3: Environmental and social issues have become less political footballs, more “we need to do something now”. The pandemic helped to highlight some important environmental and social issues and had a knock-on eff ect of people wanting something done about these problems. It might be that the damage we had been wreaking on the planet became starkly clear; as cars remained on driveways and planes were grounded on runways, people enjoyed cleaner air and water and reconnected with nature. Also our unpreparedness for the pandemic resulted in governments spending monstrous sums on disposable PPE and other equipment to help us get ahead of the curve.
On the social side there was the fact that lower income groups are disproportionately affected by the virus. And that school closures widened the educational gap between children from different socio-economic backgrounds. The virus has brought into plain view disparities in our societies and problems with our environment. And people want these problems solved. This is a profound shift.
Reason 4. We made big strides in getting out of the acronym swamp. There is no doubt that acronyms and jargon that surround ESG have held us back and have prevented a lot of investors making a shift into this style of investing. It has given the industry the misconception of being a ‘trend’ or a ‘passing fad’. Many investors also wrongly believed that ESG was purely about excluding ‘sin’ stocks, but thank goodness, arguments about whether tobacco or guns are worse than animal testing have largely left the arena. Investors of all stripes now understand that ESG is about investing in companies that either make the world better, or don’t make it worse.
A formative crisis
People are now much more switched on to the drivers of sustainability and the economic impacts they have. It is not about debating the rights or wrongs of specific companies anymore. It is about consumer preferences (lots of people drive electric vehicles or follow a plant-based diet), employee values (people want to work for companies where they are properly looked after), corporate supply chains (companies want to work with other ethical providers) and investor sentiment.
What is interesting about all of these reasons to be cheerful is that they all emerged during a period when half the world shut down. But it is true that a crisis often bears innovation,
as scientists, engineers and technologists race to fi nd a way to get us out of the hole we are in. It is hard for any of us to imagine any silver linings when the media headlines are full of black clouds. But it is true that there is good news out there – the world is changing and is changing quickly.
Many ESG champions are involved in exciting new areas and off ering solutions to the problems we face. Thanks to breakthroughs in DNA sequencing and artificial intelligence, researchers sequenced the covid-19 virus in just two days, compared to five months for the SARS coronavirus in 2003.
It is hard to believe all this happened during a pandemic. But it did. Of course, 2020 has been far from easy. But it does not mean we can’t be excited about the innovation that happened during a global pandemic. There are certainly reasons to be cheerful as we look forward to investing in ESG over the coming years.
Investment involves risk. The value of investments and the income from them can go down as well as up and you
may not get back the amount originally invested. This is not a recommendation to invest or disinvest in any of the
companies or funds mentioned. Names of companies and funds are included for illustrative purposes only.