Covid-19 has had a dramatic effect on attittudes towards environmental, social and governance (ESG) strategies as risks across the spectrum have increased, say portfolio advisers. In particular, the S is finally getting its chance to shine.
Since the virus first came to dominate global behaviour at the beginning of 2020, fund managers have had to deal with a wide range of new investment risks that have taken attention away from climate change, traditionally the top-ranked concern of recent years.
In particular, the social aspects of responsible investing – the ‘S’ in ESG – have been a focus of attention. Operational and reputational risks have been heightened during the pandemic, and investors are demanding more information on companies' employee relations and their behaviour towards the communities in which they operate.
Keeran Gwilliam-Beeharee, the executive director of ESG advisory firm Vigeo Eiris, told AsianInvestor that environmental concerns have tended to dominate the ESG industry in recent years.
This is reflected in bond issuances as evidenced by the number of green bonds globally, reporting frameworks as seen in the maturity of climate reporting initiatives, and in index products as seen in the dominance of low carbon and climate-related benchmarks. While climate concerns have not abated, the societal impacts of the pandemic are taking precedence for the moment.
“Covid-19 has really made clear the underlying social risks across society, and what their material impacts look like for investors. Even as the lockdowns begin to ease across many countries, we are now witnessing a global movement against racism and inequality, two thematics that also sit within this ‘S’ pillar and are driving new investor reflections,” said Gwilliam-Beeharee.
“They’ve suddenly found themselves having to cope with an unprecedented set of circumstances affecting their portfolio. While they’re still interested in ESG measurement, at the moment, they are more focused on coming through the tunnel alive,” Hugh Stacey, executive director of IQ-EQ Investor Solutions, told AsianInvestor. "From all the investors we have spoken to regarding our ESG dashboard, 41% of them have mentioned that they are mainly concerned about gathering data points around the 'S' and 'G' factors."
From an Asian perspective, demand for more in-depth risk analysis is coming from the largest institutions, from fund trustees, boards and family principals.
"In Japan, the large banks and insurers are expanding their exposure to private equity worldwide, and they need a better handle on their various investments," said Stacey.
"Family offices in Singapore also want a far better grip on private equity, which makes up such a large proportion of their portfolios."
Charles Yonts, head of Asian ESG research at Macquarie in Taiwan, said the ‘S’ of ESG “has traditionally suffered from middle child syndrome. Under Covid-19 is has gained the opportunity to shine. Investors’ focus has shifted hard to employee welfare as the virus has spread.”
The impact of the crisis on individual companies, as well as their responses, has varied significantly, according to Gabriel Wilson-Otto, head of stewardship Asia Pacific at BNP Paribas Asset Management.
“In terms of corporate impact, the key determinants of the impact have largely been a combination of financial leverage; operating leverage; the magnitude of the demand shock and the extent of government support," he said.
“To an extent, these factors are determined by sector exposure – but they can also be influenced by corporate actions, in particular the magnitude of financial leverage. This has increased investor focus on capital allocation decisions and the implications for business resilience," he added.
Sustainable or ESG investments have also seen strong inflows. In the US, the first quarter of 2020 was a record period for inflows into sustainable ETFs. And in Asia ex-Japan, ESG assets rose 21% in the first quarter, despite the market declines. There is also some evidence that S&P 500 ESG funds outperformed their peers.
“More broadly, this is consistent with an enhanced investor focus on corporate behaviour during the crisis and evidence of shifting investor and consumer expectations for companies,” said Wilson-Otto.
The massive reduction in business travel this year will obviously have a positive environmental impact. While climate was dipped below the radar, Yonts at Macquarie expects it to bounce back quickly to the top of the thematic heap for ESG. The driver for that is the debate around green conditions for the economic stimulus plans that each country is producing.
“Meanwhile, investors have, if anything, tightened the screws further in terms of climate engagement at AGMs. There were initially fears that these initiatives would be quietly shelved. That didn’t happen, which is very encouraging.”