Environmental, Social and Governance (ESG) Investing – Will the Pandemic Be a Turning Point?

The Covid-19 pandemic has highlighted many weaknesses in the economy and business operations, casting a shadow over the emergence of environmental, social and governance (ESG) investing. The question is, is it a turning point for the better or a major stumbling block?

The outbreak of the global pandemic has made us think about its impact on environmental, social and governance factors. Since we’ve adapted to a new way of life in a fight against the virus, can we not deter a climate disaster?

In the aftermath, how will we manage the drop in trade and the withdrawal of capital from blossoming markets which threaten a humanitarian disaster? Will the world work together to aid recovery, or will a singular approach protecting self-interest and nationalism be prioritised?

While we can’t possibly answer all of these questions, we can explore the changes already in motion and how it will shape the future of ESG investing.

What is ESG investing?

Environmental, social and governance or ESG investing is a term used for a class of investing known as “sustainable investing”. It’s a broad term covering a variety of different investments that seek positive returns and a long-term impact on society, the environment and the way a business performs.

Some of the different categories of sustainable investing include impact investing, socially responsible investing (SRI), ESG and values-based investing.

ESG is often referenced in ethical investing, as its three central factors (environmental, social and governance) are clear indicators to gauge whether a company is morally worth buying shares or bonds in. For instance, if a company has eco-friendly working processes in place or is actively trying to reform a certain issue in society, these are good signs for fund managers and investors.

The current state of ESG

This year was supposed to be the emergence of ESG into the mainstream, with the upcoming amendment to MiFID II and an increasing number of asset managers embedding ESG into their investment processes. However, despite the outbreak of Covid-19, ESG investing has simply shifted its emphasis, giving a more critical focus.

If anything, Covid-19 just shows how a health and environmental problem can be a deep social issue. There are no borders with a pandemic. While the origins of coronavirus are still up for debate, the general consensus points towards a zoonotic disease, whereby conditions are passed from animals to people.

This poses an array of questions regarding the approaches taken by businesses in maintaining the distance between the environment and humans. For example, why are so many businesses implementing processes that bring potential harmful environmental risks within closer contact to us?

Understandably, governments around the world are responding to Covid-19 by introducing measures regarding social and economic factors over the environment. But there will come a time when environmental questions need answering. It may not be soon, but it will take a greater presidency as we resume some kind of normality.

As for social factors, companies might have to start looking at rethinking the meaning of their business. Operating solely to generate profit, pay taxes and distribute to investors isn’t the be-all and end-all anymore. For the first time, the world is looking at a company’s goals and how they can positively improve society.

During the pandemic, collaboration has taken control of the way companies operate. We’ve stopped competing and started looking at ways in which we can knock our heads together to find solutions which make a real change.

In particular, the crisis has given banks the chance to shift their strategies within the community. Instead of just increasing overdrafts for customers, some banks have taken their role in the community more seriously by running charitable schemes and opening dedicated phone lines to help those who have been socially affected by Covid-19.

Governance has seen an interesting change too. Those keeping the economy moving, such as delivery workers, are taking risks, yet aren’t being fairly subsidised. Similarly, how much risk should a cleaner of a supermarket take when there’s been a reported outbreak of the virus?

Covid-19 has placed a greater emphasis on the governance of companies, including how much they pay their staff and what kind of safety precautions are in place. One thing’s for sure, with websites publicly shaming companies who are ignoring material risks during the pandemic, they’re facing a long up-hill struggle to transform the governance of the company to mitigate these factors.

Post-Covid-19 and ESG

In the upcoming months, we’ll undoubtedly see more companies and investors take a bigger interest in their direct and indirect impacts on the environment as finances improve. We’ve already seen a reduction of carbon emission since lockdown was implemented.

Don’t be surprised to see market-leading companies actually changing the way they work to become more environmentally conscious, take a closer interest in their role in society and how they manage themselves during tough circumstances. It’s a wake-up call for companies, which has arguably highlighted the importance of ESG in investing, rather than hindered it.

While cutting costs by axing employee support programmes or environmental measures seems like a logical move to secure finances, this would be a catastrophic mistake for companies in the long run. The post-Covid-19 world will be all about recovery and making every penny count. But the ones who will prevail will be those who can continue to make clear, positive changes within their company towards better environmental, social and governance – no matter how small the changes are.

As things develop over the coming months, environmental, social and governance will become an expectation and a metric to gauge whether investing in a certain company is a smart move or not. So, if a company has made desperate cuts on these factors, they may permanently damage their brand reputation and ruin any chances of recovering from this pandemic as investors start to place greater importance on those who believe in making a positive difference to the world.

Companies can no longer hide. The fallout of Covid-19 has left every company’s processes exposed and easy for investors to identify those who are setting higher standards and those who are dropping the ball in a desperate pledge to keep their doors open.

Is this a watershed moment for ESG? Most probably.

We’re here to help

At Simpson Financial Services in Leamington Spa, we always insist on a clear ESG mandate for any funds to be worthy of our clients invested money.

Every piece of financial advice we make is based on principle as well as best practice financially. We believe in doing the right thing and helping our clients follow suit.

That is why our expert team of financial advisors are here to help you create ethically screened portfolios where ESG factors have greater prominence.

To find out more, get in touch.