'ESG is arguably even more important now': experts weigh in

Yo Takatsuki, AXA Investment Managers

Head of ESG research and active ownership

Companies with the highest ESG ratings have proven to be more resilient in the face of the coronavirus market crash than those with the lowest, according to Takatsuki.

Following the end of the first quarter of 2020, AXA IM conducted an analysis of how companies with different ESG ratings performed in the bear market for stocks and bonds.

In both asset classes, ESG leaders outperformed their parent benchmark index. In equities, stocks in the ESG leaders category outperformed those in the ESG laggards category by 16.8 percentage points. 

‘For corporate bonds, ESG leaders outperformed by 5.2 percentage points in the same time period,’ Takatsuki said. 

 

Danielle Welsh-Rose, Aberdeen Standard Investments

ESG investment director, Asia Pacific

The consideration of ESG issues in the investment process is arguably even more important now, pointed out Welsh-Rose. 

The way companies are governed and how they are treating their employees, for example, are vital in how they are able to successfully navigate through this crisis, she said. 

The Covid-19 pandemic has also highlighted that ESG issues such as inequality and poor air quality can exacerbate the human damage from the virus.

People living in social disadvantage and those living in areas with higher air pollution have been disproportionately affected by the virus.

Welsh-Rose said it is more important than ever that investors engage with policy-makers on these ESG issues, to help ensure more sustainable and inclusive economic growth.

‘In the very short term, we have seen that ESG funds in the market have broadly outperformed conventional funds.

‘We have also seen continued growth in fund flows into ESG ETFs, compared to conventional ETFs where fund flows have decreased. Client interest in ESG does not seem to be negatively affected by Covid-19.’

Jessica Huang, BlackRock 

Head of Americas and Apac platform strategy and innovation

Huang said there’s been a lot of attention on how companies are responding to the pandemic, and many of these issues are E, S, and G related.  Key ‘S’ employee-focused issues are front and center – employee safety, engagement, and retention - are important in maintaining productivity.

On other ‘G’ issues, Covid-19 highlighted the importance of crisis management and broader risk management to ensure business resilience and continuity. ‘For instance, cyber security, which we have long seen as a key risk management issue, has become an increased concern given the large number of employees now working from home,’ she said. 

Furthermore, on the ‘E’ side of things, Huang said while Covid-19 restrictions on activity appear to have reduced global emissions, it has also demonstrated the impact pollution has on the overall welfare of local communities. 

‘From an investor standpoint, ESG strategies have shown continued positive in-flows. Amidst the market turbulence, investors are continuing to follow through on their long-term commitment to increasing sustainability considerations within their portfolios,’ she added. 

 

Edris Boey, Maitri Asset Management

ESG practice lead

Boey believes the Covid-19 pandemic has exposed the greatest flaws of countries and businesses, affecting everyone particularly the weak in health and the financially poor of our society.

This has revealed the gaps in investment and development priorities on the fundamentals of economies, which can be rectified by using a more holistic approach in determining allocation of resources, she said.

Research has made links between air quality, lung capacity and the degree of sickness the Covid-19 virus can make a person.

Out of 11 epidemics since 2000, more than half were respiratory-related, and infectious diseases are one of the Top 5 concerns of global leaders in terms of impact according to the WEF Global Risk Report 2020.

‘It is our belief that while sustainable investing has already been on the agenda particularly over the last five years, Covid-19 will accelerating the reshaping of our investment landscape towards a more sustainable future,’ Boey said.

Eugenia Jackson, Allianz Global Investors

Global head of ESG research

The virus pandemic will lead to more investors to use sustainability as a lens to highlight major global risks and test the resilience of businesses and systems, according to Jackson. 

Allianz GI believes corporate governance will come under extensive scrutiny. There will be greater focus on how companies allocate capital, how management performance is measured, assessed and remunerated, how the interests of employees, suppliers, customers and other important stakeholders were considered in the company’s response to the crisis. 

Jackson said environmental and climate issues may initially take a back seat as countries prioritise economic recovery in the immediate aftermath of the crisis. However, these topics are likely to return to the top of the agenda before long.

The environmental benefits of the slowdown in economic activity such as cleaner air, cleaner water and less traffic will be calculated, quantified and publicised.

‘We expect this data will provide incentives for governments and businesses to develop strategies to reduce the environmental impact of economic activity,’ she said. 

Alessia Falsarone, PineBridge Investments

Managing director

Falsarone said throughout the outbreak, it has become evident that science-based data should be the primary reference to guide policymaking as well as investment decisions.

In an effort to stabilize the state of global uncertainty, we continue to witness a strong push to make ESG information readily available to the public, she said.

In fact, listed companies have entered earnings’ season with the need to follow through on the disclosure of material risks to their business including the impact of Covide-19.

In most cases, that has resulted in general statements regarding the impact of the virus on operations, earnings’ outlook, and, ultimately, on the viability of their business model in the recovery phase.

‘Going forward, investors are most likely to keep a communication scorecard of management teams in times of crisis as a key reference ESG metric to address reputational risk: which companies successfully leveraged existing governance practices during Covid-19? Which ones had to rethink their outreach and adopt a reactive rather than proactive voice in the marketplace?’