What has the pandemic meant for responsible and sustainable investment?

The speed with which the Coronavirus has spread has affected so many parts of the world in so many ways. The economic implications of enforced lockdowns have sent markets into turmoil as investors struggle to react to the pace and implementation of financial aid packages that have outstripped anything previously seen before.

But what has the shock of the pandemic meant for investing in future? Will investors return to buying shares and bonds as they have done before? Or has the pandemic permanently altered market sentiment and where investors put their money?

One of the clear trends that has come out of the first 6 months of 2020 is the fact that, according to data from Morningstar, responsible and sustainable investment funds have fared a lot better than those indexes made up of traditional investments. Here, we look at the implications of the pandemic on responsible and sustainable investment and question why this area of the market has done so well in the face of such difficulties.

Reasons why ESG Funds are outperforming traditional investments

Even in the immediate sell-off after the Coronavirus swept from China through Europe and the States, ESG funds managed to outperform traditional investment classes. In fact, in Q12020, in comparison to traditional funds, sustainable funds were able to provide an excess return in all but one category. In some cases that excess return was 1.83% more. But why is this?

No Oil, Gas or Coal companies

One of the clear reasons for why ESG funds managed to outperform traditional funds in such difficult markets, is the fact that those funds tend to have a very large weighting in tech companies as opposed to oil, gas or coal companies.

Oil, gas and coal companies all saw their share price drastically fall in the beginning half of 2020, and it is yet to fully recover. In comparison, the Nasdaq index of tech stocks in the States has now regained any initial losses. Companies that have done well during the draconian lockdowns around the world have seen their share prices rise accordingly. For example, Amazon, Netflix and Microsoft have all made big gains thanks to the large increase in people working from home and having goods delivered more frequently.

Robust corporate governance

ESG funds only include companies that have a robust corporate governance framework in place. As a result, these funds were always more likely to be more resilient against the issues that the pandemic threw at the companies within them. Historically, many of the businesses that make up ESG funds will have a proactive approach to environmental, social and governance issues that can help a company’s strength in the future.

Morningstar’s research underlined this. It highlighted the fact that many of the funds included in the research had been open for over 10 years. In comparison, many traditional funds have been closed or merged with others when their investment strategy did not provide the returns initially promised. In fact, 75% of sustainable funds have lasted over a decade. Less than 50% of traditional funds can say the same.

What does the future hold for responsible and sustainable investment?

Given that the figures within Mornginstar’s research makes very compelling and convincing reading, what does the future hold for responsible and sustainable investment? Particularly given how the pandemic has changed people’s views on so many aspects of their lives. For example, lockdowns have shone a stark light on where to work, how to work, and how to spend leisure time.

Government investment in greener initiatives

The economic difficulties that will come from the lockdowns across the world have posed the question of how best to drive a recovery by governments. Many have championed this as an opportunity for governments to increase their spending on greener initiatives in infrastructure and technology. The hope is that this increased spending will further promote ways to be kinder to the planet and limit climate change.

Change in how returns are measured

Of course, investors currently make investments with the intention of growing their money and getting the best returns possible in the form of financial gain. However, it would appear that society’s attitudes may have shifted somewhat throughout the pandemic. Due to the reliance on those in low paid jobs and the respect for those working in healthcare settings, many now want to invest money with a social conscience. This means that investors will also be seeking benefits to society on top of their financial gains.

More emphasis on resilience

Having enjoyed a largely bull market for a number of years now, the sharp fall in the markets that the pandemic caused made investors question their investment strategies more closely. Investors now want ways to help protect their investments in the future – particularly given that a second spike in COVID19 infection rates is a very real possibility. Investors are therefore seeking out companies with an ingrained resilience, which the ESG funds that Morningstar investigated evidently have.

Active engagement from investors

Responsible investing also appears, for the moment at least, to have been given an extra boost given how the pandemic affected people’s behaviors so quickly. As mentioned previously, society appears to be valuing aspects of society and the world that they had not before. This means that investors are now not only seeking out more responsible investments that have robust ESG procedures in place, they also take a big responsibility themselves in being an active investor. There is an awareness that they can help drive change that the world arguably needs, particularly with respect to climate change.

Changes in Responsible and Sustainable Investment After The Coronavirus

ESG funds were, when they first began, seen as a marketing ploy or a flash in the pan idea. However, given how resilient the companies within them are, they stayed running and, as evidenced by Morningstar’s research, produced better returns than traditional funds.

The pandemic has only sought to emphasize this. The huge losses seen in traditional funds were largely due to heavy weightings in fossil fuel companies amongst other traditional investments. ESG funds favor other sectors less affected by the pandemic. Plus, importantly, specific companies within ESG funds usually have an active strategy with respect to the environment and a good corporate governance framework.

As a result, while the virus pandemic rages on around the world, it looks like responsible and sustainable investing could gain more and more popularity.