The future is bright, the future is green

The investment question five years ago was, why should I invest in an environmental, social and governance (ESG) manner? But now, the question is why would I consider any other investment?

The COVID-19 crisis has created the ideal scenario for ESG funds. Planes were grounded, oil price went negative, and the air seemed to clear for a moment.

The result? ESG funds have performed well throughout this year, and, according to recent research from PwC, assts in sustainable investments will increase their share of the European fund sector by more than three times in the next five years to make up 57% of funds in Europe, overtaking assets in conventional funds.

This could be due to “the Attenborough effect”, with people being more conscious about where there money is being invested, or maybe due to the fact that ESG indices have been showing better performance – or both.

What can this good performance be contributed to?

ESG indices are typically made up of fewer companies that are dependent on market cycles. The ESG indices also tend to have more companies that are so called “quality” or “growth” orientated, which have delivered relative outperformance compared with cyclical stocks during the crisis.

In bull markets some companies borrow heavily against their balance sheet, but find when cash flow dries up they struggle to survive. When properly assessing the E, S and G factors however, a high level of borrowing would raise warning signals over governance.

In a crisis like this there has been a flight from more risky companies such as these to those which are seen to be more resilient.

For these reasons, ESG stocks have shown their worth in the immediate shock of the crisis, both in terms of resilience and diversification benefits, and are likely to be a strong position when markets return to a growth trajectory.

As with any investment, these gains are not guaranteed after the pandemic, but we are big advocates of long-term responsible investing, and we will continue to be so.

Post-pandemic, the growth themes linked to ESG issues such as climate change, healthcare and digitalisation will be more relevant than ever – to people’s lives as well as their investments.

Looking forward, we believe we need to make sure that this change is permanent. The COVID-19 pandemic has done many things to us as a society, including introducing us to the ‘Cov-optimists’ – those who think the world will build back better after COVID-19. Does their belief in a green and ethical recovery signal a positive outlook for ESG investing? We hope so.

If you’re interested in adding an ESG focus to your investment portfolio, get in touch with us on 020 3823 8678.