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Environmental, social and governance (ESG) investing has been on the rise, and while some doomsayers declare that the coronavirus pandemic could put an end to it as people are preoccupied with survival, it could instead turn out to be a trigger for a far greater interest in, and demand for, ESG options.
In fact, according to a MarketWatch report, one thing the pandemic is doing is highlighting all the ways in which our current method of doing things is failing.
ESG, says the report, could provide "the potential for a new normal that's better for our climate future as investors reweight their portfolios in light of current events." And it can do so in a range of different ways—with the pandemic driving change in a way that could see ESG emerge as the "new normal" in investing.
Here are 9 ways the pandemic could affect ESG.
9. Proving that climate change can be tackled.
There's a terrible cost to simply shutting down the world's economies, but the fact that we've pretty much done so to save our own lives has provided glimmers of hope that it's not too late to shift away from polluting businesses and policies to save the whole planet.
Air pollution is down in China and Italy—even Venice's iconic canals are clearing—and there are multiple other indications that perhaps the road ahead can turn in the direction of containing climate change.
Investment in a low-carbon future, on the heels of such a hopeful sign for the planet, if not for humans, could signal a sea change in how markets will regard renewables.
8. Judging companies by a different standard.
How well companies are prepared for a volatile future could push investors to demand that policies that continue to rely on high energy consumption, fossil fuels and a disregard for the risks that such business-as-usual strategies espouse be discarded in favor of more sustainable operations.
7. Changing how benefits are regarded.
A business environment that finds it acceptable to deny employees such benefits as health care and living wages, not to mention safe working conditions, may not be able to survive in the wake of millions of people being suddenly thrown out of work with no pay and no lifeline, not to mention no way to afford a doctor if they are expected to perform without safety provisions.
Too many people are being affected by policies that regard employees as so many disposable parts, simply to be replaced if they fall ill. ESG screening that looks at all these factors will likely take on far greater importance.
6. Socially responsible corporate behavior may gain in value.
Employers have played a significant role for many workers during the pandemic — increasing benefits, paying hourly workers who cannot work, offering information and guidance to stressed employees.
People will likely remember these positive actions, an Advisor Perspectives report says. "We expect business will go to those companies deemed to have done the right thing by their employees, customers and communities in this most trying of times…. companies will be remembered and rewarded on their actions during this crisis."
5. Changing public demand as coping strategies change behavior.
The MarketWatch report also points out that changes made in today's locked-down world to avoid spreading the virus—online meetings, remote work, etc.—will result in a change in demand for more carbon-heavy industries like airlines and other forms of transport.
This could offer less carbon-heavy industries a "natural competitive advantage to companies that are investing in energy efficiency, renewable energy and low carbon practices."
4. Flight to quality.
The fact that ESG EFTs have seen better fund flows during the last few weeks' volatility—and indeed considerably lower outflows, with just 8 percent of such flows compared with 25 percent of all others, could be convincing investors that the future of their financial health could depend on companies that seek to sustain or promote other kinds of health through their ESG policies.
3. ESG is already on the radar of a growing number of companies.
They may not actually be following ESG criteria, says a Morningstar report, but while in 2018 more than 50 funds added ESG language to their prospectuses (such funds "now say they consider ESG factors in their investment process," says the report), in 2019 nearly 500 funds did the same.
It adds, "The explosive growth of funds considering ESG reflects the now widespread recognition among asset managers of the materiality of ESG factors in evaluating investments, the greater capacity of asset managers to evaluate ESG factors through increased analytical resources and personnel, and, no doubt, a desire on the part of asset managers to signal their ESG awareness to end investors."
In the wake of the pandemic, investor attention will no doubt be even more focused on such factors—and funds will be compelled to literally put their money where their mouths are by actually addressing those factors.
2. Companies can expect a lot more questions on risk.
In the wake of the volatility brought on because of the pandemic, says a Wall Street Journal report, investors will be asking a lot of hard questions about nonfinancial risk—things like disaster preparedness and continuity planning—not to mention human rights issues (those benefits again!) and diversity.
And questions are already being asked of companies about how they will help employees, says the report, writing, "Citigroup Inc., meanwhile, in a note to clients said investors are asking more questions about issues such as employee benefits and mortgage relief, with the goal of identifying corporate strategies to limit the economic damage from the pandemic."
Other concerns arising out of the pandemic include "the pros and cons of having temporary workers and stock buybacks" that are likely to become prominent corporate governance issues.
1. Companies will be expected to do more.
The WSJ report points out that corporations' pandemic response, such as the decision by Ford Motor Co. and other companies to start manufacturing medical supplies, "could highlight for some investors the role that private companies play in addressing social problems.
It quotes George Serafeim, a professor of business administration at Harvard Business School who focuses on sustainability, saying, "More and more people are understanding that companies are part of the solution." After all, they don't operate in a vacuum.
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Marlene Satter
Marlene Y. Satter has worked in and written about the financial industry for decades.
