Virus ‘Reset’ Global Economy in Favor of ESG

Man in a mask to prevent spread of the coronavirus walks his dog in front of the New York Stock Exchange, where the floor is closed to traders due to the virus. April 12, 2020 (Photo by Anthony Quintano) Creative Commons license via Flickr

By Sunny Lewis for Maximpact

NEW YORK, New York, April 21, 2020 ( News) – “What coronavirus has done is reset the economy. It has accelerated the need for a new, better operating system that gives more Americans the incentives and, in many cases, the opportunities they need to create broad-based prosperity,” Martin Whittaker, CEO of JUST Capital and a Board member of the Carbon Disclosure Project U.S., wrote in “Forbes” earlier this month, click here to read the article.

Martin Whittaker is the CEO of JUST Capital, responsible for the overall leadership of the organization. (Photo courtesy Yale Center for Business and the Environment) Posted for media use

“That system is stakeholder capitalism,” wrote Whittaker. “A system that shares the spoils of victory with those who make it possible. A system that motivates capital to focus on long-term value creation; that promotes disclosure and performance measurement on issues society cares about; that fosters systems thinking and mutual resiliency; and that captures for all time the incredible spirit of community that has characterized corporate America’s response during the crisis itself.”

“The emphasis on quality companies that invest for long-term impact combined with lower ESG risk validates the argument for sustainability as a hedge during down-markets,” wrote Whittaker.

ESG stands for Environmental Social and Governance, and refers to the three key factors to consider when measuring the sustainability and ethical impact of an investment in a business or company.

“We are seeing this firsthand as our own JUST Index is outperforming the S&P 500 in this same period. Almost all of the investors we talk to believe that the crisis will accelerate interest in ESG strategies, as well as influence the underlying strategies themselves, mostly by emphasizing the “S” – the social factors that are currently so critical,” Whittaker wrote.

Today on the New York Stock Exchange, stocks fell for a second day as the collapse in oil prices deepened due to falling demand as people remain at home for fear of spreading the virus. The Dow dropped about 630 points, dragged down by Merck & Co. and Boeing. The S&P 500 retreated about three percent, bringing the week-to-date losses to 4.8 percent. The Nasdaq Composite dropped 3.4 percent.

But a March 13 analysis by Bloomberg found that ESG investment funds with longer track records are outperforming their newer rivals in the most tumultuous markets since the 2008 global financial crisis.

Of the more than 2,800 ESG-themed funds tracked globally by Bloomberg, about 400 were in positive territory for the year. There were 45 funds that have managed to hold onto gains of more than 10 percent year-to-date and more than 70 percent of those funds opened before 2015.

Still, there are declines in ESG-sensitive companies. According to Bloomberg data, Parnassus Core Equity, the largest ESG-focused fund in the United States with about $17 billion of assets, has declined 21.2 percent since January 1.

Parnassus Investments, which has integrated environmental, social and governance factors into its fundamental investment process since 1984, has adopted a firmwide policy of avoiding all investments in fossil fuel companies. This policy was prompted by the firm’s “growing concerns about the ongoing deterioration of the competitive advantages and relevancy of the fossil fuel industry. The move also reinforces Parnassus’s commitment to a low-carbon future.”

“Corporate behavior in a time of crisis – both in how companies treat employees and customers, and their impact on society in a time of need – can have lasting implications, both positive and negative,” says Jessica Alsford, who heads Sustainability Research at Morgan Stanley. “These factors can be linked to long-term performance and returns.”

Employee wellbeing and company culture are a few of the ESG criteria, but now investors must also note how company responses to COVID-19 help or hurt their customers, and society as a whole.

“These actions could go a long way in positively or negatively affecting a company’s reputation in the eyes of its various stakeholders,” says Alsford.

Companies may not have easy answers for how they should balance the needs of employees, customers, investors and society during the pandemic. The right actions can vary across sectors and be dictated by changes in product demand, government-mandated shutdowns, workforce flexibility, and the level of fiscal policy support.

Even before the coronavirus outbreak, more investors were evaluating companies according to their environmental, social and governance practices. And now, during the pandemic, corporate decisions on human capital, customers and society carry even greater weight.

As companies face intense scrutiny during this crisis, ESG factors will be a key layer of diligence in evaluating an investment.

“Potential for outperformance may be related to the longer-term nature of good ESG integration,” said Erika Karp, founder and chief executive officer of Cornerstone Capital Group, an impact-investing advisory firm that oversees more than $1 billion for clients.

Managers of sustainable funds have long used ESG factors to limit risks in their portfolios. ESG-aware companies are often invested in technology and health-care stocks and they generlaly have few or no holdings in fossil-fuel companies, which have plunged in value as oil prices fell the most since the Gulf War of the early 1990s.

At the same time, these environmentally-savvy companies tend to be underexposed to heavily-polluting companies such as cruise-line operators and airlines.

“Every time we go through a significant change in oil prices, be it up or down, it increases the case for developing non fossil-fuel methods of generating energy,” said Cheryl Smith, a money manager at Trillium Asset Management in Boston.

Some of this year’s top-performing ESG strategies have bet on technology and healthcare stocks like Microsoft Corp., Becton Dickinson and Thermo Fisher Scientific Inc. Shares of these companies have outperformed as the virus has forced more people to work from home and seek health advice online.

Shares of Zoom Video Communications Inc., whose videoconferencing technology is being widely used instead of travel or in-person meetings, rose to a record level this month.

Teladoc Health Inc., which offers healthcare services through phone and video consultations, also reached an all-time high.

Investors in ESG funds have not yet been scared away by the market slump. Net inflows into exchange-traded ESG funds were $1.4 billion last week, according to Bloomberg data.

Still, “a sustained, broad-based market downturn would test investor resolve on ESG commitments,” said Lawrence Heim, director of partnerships at the Responsible Business Alliance, which works with companies to incorporate ESG into their supply chains.

“Like all equity funds, sustainable equity funds suffered sudden and large losses during the first quarter of 2020 because of the coronavirus pandemic, but they held up better than conventional funds,” wrote Jon Hale, PhD, CFA, head of sustainability research for Morningstar, a global financial services firm based in Chicago, Illinois.

Comparing the first-quarter returns of 206 sustainable equity open-end and exchange-traded funds available in the United States with those of their respective categories, sustainable funds performed better on a relative basis, Hale found.

Sustainable funds performed well during the first quarter, with 70 percent finishing above the median in their peer groups and 44 percent finishing in the top quartile compared with only 11 percent in the bottom quartile.

“Seven out of 10 sustainable equity funds finished in the top halves of their Morningstar Categories, and 24 of 26 environmental, social, and governance-tilted index funds outperformed their closest conventional counterparts,” wrote Hale on the Morningstar website April 3.

“So,” Hale wrote today, “I think it’s great that sustainable investing is showing it can deliver competitive performance on an ongoing basis, in both up and down markets, aided by the insights of ESG analysis, but keep in mind the bigger-picture purpose of sustainable investing.”

“It’s about investors helping/encouraging/cajoling companies to move toward a long-term stakeholder-centric model of corporate behavior that is better for people and the planet and will be, over the long run,” wrote Hale, “better for shareholders.”

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