January 19th, 2021
How has ESG investing coped during the pandemic?
In recent years, environmental issues have dominated headlines as high-profile figures such as David Attenborough and Greta Thunberg have sought to raise awareness about the effects of global climate disruption.
This increased awareness led to a growth in ESG and ethical investing, a trend which accelerated after the outbreak of the coronavirus in 2020.
If you’re considering ESG investing, you might have wondered how it has fared. Read on to find out how ESG investments have performed during the pandemic.
ESG factors determine how ethical an investment is
ESG – Environmental, Social, Governance – is a term used to describe the three main factors in measuring the societal impact and sustainability of a company.
- Environmental factors – When you hear the term ESG, environmental factors may jump to mind. Issues such as global warming, plastic waste, and pollution are all serious environmental problems that many people want to do their part in fixing.
ESG investing prioritises companies with production methods that are both ethical and sustainable, as well as ones which aim to lower their carbon footprint.
- Social factors – This looks at how a community views a company, as well as the company’s relationship with communities and their own workers. This criterion considers issues such as fair and equal wages, good working conditions, and good employee relations.
An example of investor reaction to a company’s poor record on social issues would be the Boohoo wages scandal in 2020, which saw the company’s value fall by more than £1 billion.
- Governance factors– This criterion looks at issues such as the fair election of Board members, the pay of executives, as well as wider issues such as corruption or nepotism within a company.
Failures in governance were highlighted as an important issue due to the role they played in causing the 2008 financial crash.
ESG can be a good way to tailor your investments to match your ideals. There are essentially three different ways that fund managers approach ESG investing.
The first is with positive screening, which involves seeking out companies with a proven record on ESG issues. The second approach is negative screening, which instead rules out companies with a poor ESG record, such as ones which manufacture guns or tobacco.
Finally, there is the ‘best in class’ approach, which means choosing a sector that you would like to invest in and then selecting the company with the best ESG credentials in that sector.
The sustainability of ESG investing has made it an attractive option
Increased awareness of ESG issues in recent years has prompted increased interest in ethical investing. According to a report published in FT Adviser, inputs into ESG funds increased by nearly 2,500% between 2014 and October 2019.
One of the main attractions of ESG is its focus on sustainable investments, which is why there has been a large increase in interest in ESG funds in 2020.
According to a recent survey by insurance provider Aviva, over half of people surveyed said that the pandemic had made them more likely to consider ESG factors when investing. Among those who already consider ESG, 81% said the pandemic has made it even more important.
This change in attitudes has had direct impact on people’s investing habits. According to a report published in FT Adviser, 85% of surveyed UK financial advisers have seen a rise in client requests to allocate some of their capital to ESG funds since the start of the pandemic.
One of the consequences of the pandemic was a fall in the price of oil, due to significantly reduced demand. To many investors, this showed the fragility of the energy sector as funds including oil had been impacted whilst many ESG funds had not.
This is partly because many ESG funds invest heavily in the pharmaceutical and technology industries, which both prospered during the lockdown.
Furthermore, the greater element of community spirit and shared responsibility that many people showed during the pandemic may also have affected people’s investment decisions.
For many investors, the pandemic was ESG’s first real ‘acid test’ and demonstrated that ESG not only has moral benefits, but can also be a dependable and profitable investment choice.
A report found stocks with a high ESG rating to be much less volatile
As the coronavirus pandemic grounded planes, reduced the number of cars on the road, and disrupted many businesses, sustainability became an important issue for many investors.
According to figures from Fidelity’s Putting Sustainability to the Test report, published in FT Adviser, stocks with a higher ESG rating were far less prone to volatility in the broader market, falling less when markets collapsed but also rising less when they began their recovery.
The resilience of ESG stocks made them an attractive option, and the report noted that inflows into ESG funds had quadrupled between January and November.
Furthermore, stocks with high ESG ratings outperformed those with lower ratings in every month from January to September, with only one exception.
The resilience and profitability of ESG funds during the pandemic only goes to show that investing with a conscience can have its rewards.
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The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.