By the start of this year, when we were plunged into another lockdown, it felt as if silver linings were very thin on the ground. But as we emerge from lockdown three in the UK, with Britain charging ahead in the vaccine stakes and with the leaves on the trees starting to bud, it feels as if there is a lot more optimism in the air.
That sentiment is certainly reflected in ESG investing , which has emerged as a beacon of hope and future prosperity. Here are our ESG reasons to be cheerful as we head towards spring:
1) ESG has passed the Covid stress test
In 2020, around 40% of ESG funds were top quartile and that was rewarded with more than $120bn inflows into ESG equity strategies. Just to give you a comparison, there were $125bn of outflows from non-ESG equity strategies. Also, a third of all inflows into exchange traded funds (ETFs) were into ESG ETFs. The inflows show us ESG is winning – both in active fund management and in passive fund management.
2) The ‘S’ in ESG climbed into the front seat with the ‘E’
There is no doubt 2020 brought more widespread focus on our health and education, both at an individual and collective level. Coronavirus brought it home to everyone, as hospitals filled and schools and colleges shut their doors. When you combine this with the proliferation of social media and overlay everyone’s personal experiences, you create a situation where investors understand companies that help us eat better food, work out regularly, provide sound educational tools and offer medical care to more people are going to be very important economic actors.
3) Environmental and social issues have become less political footballs, more ‘we need to do something now’
The pandemic helped highlight some important environmental and social issues and had a knock-on effect of people wanting something done about these problems. It might be that the damage we had been wreaking on the planet became starkly clear; as cars remained on driveways and planes were grounded on runways, people enjoyed cleaner air and water and reconnected with nature. Also our unpreparedness for the pandemic resulted in governments spending monstrous sums on disposable PPE and other equipment to help us get ahead of the curve.
On the social side there was the fact that lower income groups are disproportionately affected by the virus. And that school closures widened the educational gap between children from different socio-economic backgrounds. The virus has brought into plain view disparities in our societies and problems with our environment. And people want these problems solved. This is a profound shift.
4) We made big strides in getting out of the acronym swamp
The acronyms and jargon that surround ESG have held us back and have prevented a lot of investors making a shift into this style of investing. It has given the industry the misconception of being a ‘trend’ or a ‘passing fad’.
Many investors also wrongly believed ESG was purely about excluding ‘sin’ stocks, but thank goodness, arguments about whether tobacco or guns are worse than animal testing have largely left the arena. Investors of all stripes now understand ESG is about investing in companies that either make the world better, or don’t make it worse.
People are now much more switched on to the drivers of sustainability and the economic impacts they have. It’s not about debating the rights or wrongs of specific companies anymore. It is about consumer preferences (lots of people drive electric vehicles or follow a plant-based diet), employee values (people want to work for companies where they are properly looked after), corporate supply chains (companies want to work with other ethical providers) and investor sentiment. In a nutshell, it’s hard to argue that ESG investing is niche.
Patrick Thomas is investment director and head of ESG investing at Canaccord Genuity Wealth Management and an ESG Clarity editorial panellist.
