Unintended consequences of the coronavirus – ESG
Since lockdown, London’s roads have been empty. Many have more cyclists than cars. You can look across the city from Primrose Hill or Richmond Park (should you live nearby) and see the Shard and Canary Wharf in their full glory, for once not obscured by smoggy haze.
London’s air pollution has all but disappeared and the sky is blue rather than its usual greyish brown.
But in the coronavirus downturn ESG investing has done very well, with cash flowing into ESG funds amid record selling of exchange-traded funds as a whole.
This is an unexpected consequence of the social distancing aimed at slowing the spread of coronavirus. And it’s a reminder of the importance of the environment to investors.
Environmental, Social and Governance (ESG) investing has been a strong investment theme in the last couple of years. Some cynics say it is a bull market phenomenon – nice in the good times, but destined to be dropped when times are tough and investors do what’s necessary to survive. But in the coronavirus downturn ESG investing has done very well, with cash flowing into ESG funds amid record selling of exchange-traded funds as a whole.
ESG assets often perform better during market sell-offs. This happened in Q4 of 2018. And year to date, highly-rated ESG companies have outperformed poorly rated ones by around 3-4%.
Now that we are all practicing social distancing, the S of ESG – social factors – looks likely to be a strong driver of performance. Companies that prioritise health and safety with good workforce policies will be trusted and may come out of this crisis in better financial shape. We think ESG investing will remain attractive to investors.
As we already know, air travel creates a lot of greenhouse gases – the ones thought to be accountable for global warming. Taking a long-haul flight generates more carbon emissions than the average person, in dozens of countries, produces in a whole year! Since the lockdown, air travel worldwide has dropped to practically nothing, meaning greenhouse gas emissions have plunged.
It would be naïve to think that this positive outcome will persist after the crisis is over. The roads will fill with cars again, and the skies with planes. Perhaps, having been prevented from using either for an extended period, people may have discovered that there are benefits to working from home, getting used to conference calls, ditching the commute and travelling less.
Technology has made working from home much easier than in the past. I used to work from home when download speeds were in KBs rather than MBs, files had to be carried between home and office on floppy disks and you could only speak to one person at a time on the telephone. Fortunately, broadband, cloud storage and conference calls have made the lockdown a lot easier for everyone, including our Investment Team!
Technology is also helping businesses that are less desk-based than 7IM. A friend of mine who is raising capital for a forestry fund thought the project would have to be shelved, as it is no longer possible to take potential pension fund clients to see the forests.
But technology came to the rescue. A conference call of 100 people was organised with a presentation that included a video taken by a drone in real time, so potential investors could see what they were being asked to fund.
And how appropriate that the launch of a fund in one of the original sustainable asset classes – timber – should be done in such a low carbon way. Rather than fly a hundred people to a forest, fly one drone around with 100 people watching!
Society shapes companies
Another unintended consequence of the coronavirus crisis may be a change in how our society works, and what it values. If, by keeping to the rules of social distancing and isolation, we manage to contain it, will that cause us to think about how we behave to one another afterwards?
The last time we had to work together like this to defeat a common enemy was the Second World War. After the war, the British people were so traumatised that they rejected the government that had brought them victory, pressing instead for social change, which led to the creation of the NHS – and haven’t we needed them this past few weeks!
China was the first to impose a lockdown to control coronavirus. A recent survey has shown an increase in collective values, etiquette, appreciation and service to others in the country. Here in the UK, three times as many people as expected signed up to help the NHS, suggesting society is thinking about how they can help others get through the crisis.
Meanwhile, let’s hope that the actions we are taking to keep ourselves socially distanced will help to bring the virus under control and save lives.
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