COVID’s Impact on sustainability
Amidst the turmoil created by the COVID-19 crisis, what stood out was the continued shift towards sustainable or ESG (Environmental, Social and Governance) investing. Global sustainable funds saw strong capital inflows of ~US$117 billion, versus a net outflow of ~US$30 billion for the broader fund universe over 1H 2020. Sustainable funds and indices also outperformed their counterparts in 1H 2020. For example, returns on the MSCI World Socially Responsible Investment (SRI) index outperformed the MSCI World index by 411bps over the same period, even controlling for sector tilts (e.g. underweight energy, overweight technology).
The pandemic has also highlighted some key ESG-oriented structural shifts. First, it has magnified the vulnerabilities and awareness of rising social inequality, specifically in the areas of access to technology, healthcare, jobs and social safety nets. Second, safety measures and supply chain disruptions have triggered a huge push to technology and automation, which could result in an even faster pace of job displacements, especially for lower-skilled workers. Third, the disruptions to cashflows, production and operating models have heightened the need for good governance, corporate resilience and robust capital allocation strategies.
While the Environmental aspect, particularly climate change remains a key focal point, COVID-19 has resulted in Social factors having a greater influence on corporate behaviour, economics and financial performance. For example, as the figure below illustrates, companies that pay fair wages to their employees saw their share prices clearly outperform, as compared to that of companies that ranked poorly on fair pay – thus giving new impetus to “stakeholder capitalism” despite current pressures on companies’ profits and investor returns.