How the COVID-19 Crisis Validated ESG Investing

Before the COVID-19 crisis rocked the global economy, bottom-line evidence already suggested an increased interest in ESG-lens investing, or selecting portfolio companies based on environmental, social, and governance factors and reporting. The question is whether or not a strong ESG profile could help, or hurt, during a time of great upheaval. Financial advisors are already beginning to answer that — and all signs indicate the ESG movement will emerge from COVID-19 stronger and more influential than ever.

The potential for a sharp upturn in ESG investing may seem like a silver lining to a horrible tragedy, but it’s not. There is no silver lining to a lethal infectious disease outbreak that has shattered lives and wrecked economies all around the world.

Think of ESG investing as a recovery strategy, and the future of the global economy comes into sharper focus.

ESG funds are still outperforming conventional stocks

In the not too distant past, ESG goals were perceived as window dressing. More recently, ESG reporting has been recognized as a strategy that exercises a positive financial influence over operations, and improves the prospects for sustainable growth.

Recent events continue to provide support for ESG investing.

On January 29, with the U.S. financial markets still operating in overdrive, Bloomberg reported that ESG funds were outperforming the Standard & Poor (S&P) 500.

By mid-March, global financial markets had plummeted. ESG funds were not spared, but they were holding firm compared to the S&P 500 overall.

According to a March 13 analysis by Bloomberg, ESG funds fell an average of 12.2 percent for the year, while the S&P fell more than 24 percent.

The March 13 numbers also reveal just how mainstream the ESG movement has become. Among the ESG funds experiencing the highest growth are two older, experienced funds that enjoyed 40 percent growth, thanks to a hefty share of health, pharmaceutical and technology company equities in their portfolios.

ESG investing as a recovery tool

The relatively strong performance of ESG funds during the COVID-19 crisis is all but certainly sparking interest among conventional investors. Indeed, financial advisors are already citing COVID-19 recovery as an incentive to invest in ESG funds.

For example, last week Barclays announced the addition of an ESG assessment and indicators to its Fundamental Research arm.

In a March 24 press statement, Jeff Meli, global head of research for Barclays, noted that sustainability concerns were already beginning to go mainstream before the COVID-19 crisis, and he outlined how ESG analysis can impact the COVID-19 recovery effort on a broad basis.

Barclays' new research initiative, he explained, will help sort out the impact of COVID-19. One outcome (and the most likely one), is a “greater sense of urgency and responsibility toward everything from consumer behavior to climate change, supply-chain practices and the future of work and mobility – and potentially alter the nature of the investment process as a result,” Meli said.

The future will be more sustainable

Another powerful endorsement for ESG-lens investing occurred on March 27 through Nigel Green, founder and CEO of the global financial consultancy deVere Group. In a press statement, Green outlined three key reasons to expect a “skyward surge” in ESG investing.

First, as many others have noted, Green emphasized that ESG funds had amassed a strong bottom-line track record before the outbreak, and they have continued to overperform relative to conventional funds.

Second, Green insists the COVID-19 outbreak has forced a reckoning among conventional investors who previously dismissed sustainability as a fundamental goal. The COVID-19 outbreak, he observed, “has underscored the complexity and interconnectedness of our world in terms of demand and supply, in trade and commerce — and how these can be under threat if not sustainable.”

Green concluded by drawing attention to a third factor: the influence of millennial investors. “Millennials — those who were born in the time period ranging from the early 1980s to the mid-1990s and early 2000s — cite ESG investing as their top priority when considering investment opportunities,” he said.

The millennial investor trend has been widely recognized as a powerful force in the ESG movement, and the fallout from COVID-19 virtually guarantees that it will be unstoppable.

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