April 22nd marked the 50th anniversary of Earth Day, a worldwide event that recognizes our Earth’s resources are finite and deserve to be protected, and a day that jumpstarted the evolution of an investment philosophy we practice today called Environmental, Social, and Governance – ESG – investing.
Demand for ESG investments is on the rise, and the reason is simple: people want to invest in well-run companies that care about ALL their stakeholders and create a net positive effect on the environment. Companies that adhere to ESG principles and policies will outperform over the long-run – they are more sustainable. And in these uncertain times, people are reaching for what is sustainable.
During one of the worst economic shocks on record, the COVID-19 pandemic, which has been exacerbated by an oil price war, ESG investments have done better than their benchmarks.
In the first quarter of 2020, 70% of sustainable funds finished in the top half of their category across asset classes, and that was regardless of whether they were actively or passively managed, according to Morningstar.
In 2019, net flows to mutual funds and ETFs that received high sustainability ratings were $20.6 billion, almost four times net flows of $5.5 billion in 2018, according to Morningstar. Last year was also one of the best years for the S&P500 and a stellar year for fixed income, but investments that were optimized for ESG issues had even better returns.
Companies with higher ESG scores tend to be more profitable and have more resources to invest in ESG issues, and their earnings are less volatile. This in turn makes them better companies that are positioned to do well over the long-term.
For more on Sage ESG Investing, click here.
For more on Sage’s Sustainable Investment Policy, click here.
Sustainable Investing in the Age of COVID-19
As economies worldwide are reeling from COVID-19, the pandemic is shining a light on companies that truly embrace ESG principles. At Sage we will be closely watching the impact companies’ Environmental, Social, and Governance policies have during this unprecedented time. To gain a better understanding of the ESG factors that are relevant right now, we’ve provided some examples below.
(E) Environmental Impact
If there is one area that has seen some positive results as a result of the pandemic, it is the environment. Cleaner air and a decline in carbon emissions due to travel restrictions, as well as cleaner water as a result of the absence of normal boat traffic have been signs of a healthier environment. Prior to COVID-19, climate change risk concerns had been increasing among the ESG investing community and had gained greater weight in ESG analysis. Unfortunately, many of the positive environmental benefits engendered by COVID-19 have not been the result of active company management; however, they have brought awareness of climate change to audiences beyond ESG. It is our hope that once the dust settles companies will actively manage the ways they can lessen their carbon footprint, whether that be by telecommuting, less business air travel, offsetting carbon emissions, etc.
(S) Social Impact
Companies across industries are struggling to operate and are being forced to let go of employees as a result of significant losses. As of Monday, April 20, 22 million people have filed for unemployment, with the current unemployment rate inching near a whopping 18% of the U.S. workforce.
From an investment standpoint, people should be paying a close eye to the companies taking swift, supportive actions for their employees. Some franchises, major conglomerates, and even small businesses are still finding ways to pay their employees, whether through CEO pay cuts or loan payouts while their doors remain shut for now.
With “stay-at-home” orders remaining in place across the United States, working from home has become the new norm for many businesses, potentially changing the future of offices forever. Companies that support their employees during this time will be closely watched by ESG investors.
(G) Governance Impact
From managing business risk, to customer and employee relations, to implementing policies and procedures, how companies are making decisions at the executive level will demonstrate to investors who is making a difference.
We are seeing companies across industries going above and beyond to support health care workers and all essential employees. Car manufacturing companies such as Ford, Tesla and GM have mobilized, making ventilators and other medical devices for the Strategic National Stockpile. Fashion designers and luxury labels have also stepped up, helping overcome shortages of masks and other personal protective equipment (PPE) in some of the hardest-hit countries.
Taking efforts such as these during such a challenging time will demonstrate a company’s core values, and in turn, significantly boost investor sentiment (and companies that do not, may incur irreparable brand damage). The more involved and responsible companies become amid this pandemic, the higher their sustainability will be long-term.
Coronavirus relief efforts have an enormous impact on investing this Earth Day. It is evident that companies with high ESG ratings have been proactive in taking action against the pandemic. Insight into the higher-rated ESG companies shows us the values investors are seeking at this time; including trust, transparency, creativity, authenticity, and communication.
Embracing Sustainability’s Silver Linings on Earth Day
Earth Day celebrations will certainly look different than years past; however, that does not mean we should not celebrate. Let’s continue to highlight companies that are doing all they can to continue to follow ESG policies, from protecting the environment, employees, and customers, to holding their leaders accountable to make a difference.
Listen to Bob Smith, President & CIO, talk with Jill Malandrino of Nasdaq TradeTalks about ESG performance amid COVID-19.