THROUGH the disruption that the Covid-19 pandemic has brought to the global economy and markets in 2020, sustainable investing strategies and instruments have delivered comparable or better performance than conventional equivalents.
This is a short timeframe and an unprecedented situation so relative performance should not be directly extrapolated over the longer term, but investors with SI exposure within a diversified portfolio should be encouraged by recent short-term returns.
We believe the following trends have arisen or are accelerating as a consequence of the Covid-19 pandemic and may affect the longer-term landscape of sustainable investing.
1. Increased investor focus on environmental, social and governance considerations
Corporate management of issues such as human rights, employee wellbeing and community relations are under scrutiny, as issues that were considered luxuries in the past (eg flexible working models) have become critical business continuity mechanisms in the pandemic lockdown. Their actions could have a lasting impact on their reputation and future relationships with customers, vendors and regulators.
Sustainability is at the heart of the recovery plan for many governments. With plans to invest in large-scale renewables, clean transport, sustainable food and shortening and diversifying global supply chains, this will likely support ongoing investment in sustainable industries, even with short-term setbacks related to the lockdown and the need for urgent funding to be directed to citizens and essential industries such as healthcare.
2. Elevated importance of ‘social’ to companies
While we expect many long-term dynamics in sustainable investing to retain their existing focus, we are seeing a structural change in focus on social issues. With the possible exception of gender-lens investing over the past three years, social issues have played second fiddle to environmental issues for many years. As Covid-19 has focused the world's attention on public health, any social changes that emerge, such as investment in healthcare or elderly care, will ultimately be reflected in new investment opportunities.
There are many important social themes but we highlight healthcare, access to medicines, education, sustainable tourism and social bonds as areas that we think will rise in importance to investors in the aftermath of the pandemic, particularly in the context of improving provision to underserved communities to have a positive impact.
3. Awareness of economic benefits and risk should keep investors focused on environment-related opportunities
It has been widely reported that 2020 carbon emissions for countries and most corporations will decrease as a consequence of the economic lockdown. So far, we have seen the largest decline in global carbon emissions on record, with energy analysts now forecasting that global energy-related CO2 emissions (two thirds of global greenhouse gas emissions) will fall by more than 5%. This is more than four times as much as they fell in previous financial crises. There are also direct links between the environment and the health crises, with preliminary WHO studies identifying correlations between high air pollution and more severe cases of Covid-19.
Investor, corporate and policy momentum on environment-related issues was accelerating into early 2020, alongside increased societal action such as climate school strikes. In particular, we think that renewable energy, sustainable transport, biodiversity and green bonds will be in focus in the aftermath of Covid-19.
4. Structural embedding of SI across asset classes
A low-growth and low-bond-yield environment should drive the adoption of SI philosophies and new issuance over a wider range of asset classes and instruments, diversifying beyond the dominance of equities and, more recently and to a lesser extent, bonds.
We see strong potential for structural changes in SI and for innovation in SI-aligned investment strategies in alternative asset classes. However, attention will need to be paid to the sustainability benefits of new approaches, to avoid ‘green washing’.
Hedge funds, structured products and potentially other derivatives could provide sustainable investors with important risk-management capabilities using underlying securities that have a link to their personal values or to sustainable economic activities. They would make most sense when used as diversification to a core SI portfolio, particularly where the investor wants to remain a long-term holder of other sustainable assets but manage interim risk related to market movements, currency, capital protection, tax efficiency etc.
5. SI performance benefits should remain evident as seen during the recent volatility
SI strategies are not a homogenous group of investment strategies (our SI portfolio identifies eight distinct, although not mutually exclusive, categories of SI approaches and instruments) but, in aggregate, the performance of ESG indices, funds that self-declare as sustainable, and specific ESG instruments was highly resilient in the first quarter of 2020.
Looking ahead, we still expect a diversified portfolio of global SI equities and bonds to perform overall in line with conventional strategies. While the ESG leaders’ and improvers’ approaches will offer slightly more defensive characteristics, we think allocations to ESG themes and ESG engagement equities and high-yield bonds will be the cornerstone of growth and returns opportunities. We also see benefits in continuing to focus on bonds of the highest credit quality: ESG leaders’ corporate bonds, green bonds and development bank bonds.
In addition, private markets fund managers who have set robust impact-management frameworks since inception and have experienced engagement teams as better positioned to weather the crisis and prepare for growth and recovery.
The crisis underscores the relevance of ESG considerations to company performance and investment returns, and we expect that this will continue to influence corporate and investor actions going forward.
Robert Broughton is a senior client adviser at UBS Wealth Management in Jersey. Born in Jersey, Robert has had an interesting and varied career so far, travelling extensively and spending several years living and working in the Middle East before coming back to the Island over ten years ago to join UBS.
Disclaimer: The value of an investment and the income derived from it can fall as well as rise (as a result of market and currency fluctuations) and you may not get back the original amount invested. Past performance is not a reliable indication of future results. Projections or forecasts are not a reliable indication of future performance and may not materialise.
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