Why the Pandemic Paves the Way for ESG

By Jens Peers, CEO and CIO, Mirova US

The asset management industry is quite fortunate in that most of its employees can work from home to do their jobs. There is less travel, certainly. And it's also clear that not every asset manager involved was actually ready to apply to this new and rather ‘remote’ model. We learned from the pandemic that the industry has to change in a way that other industries are changing as well.

From an investment point of view, there are some elemental considerations to be made. We see that, for instance, in many cities in the world, the air quality improved drastically following lockdown. Would you like to go back to more pollution?

If the answer is no, what does this supposed backward step from the professional life as we know it means for the companies we invest in? These are the types of questions that people are starting to ask themselves. And as a consequence, we see significant shifts towards a bigger focus on sustainable investing in general.

Moving With the Times

Sustainable investing, on average, has proven to outperform during the crisis – and in many cases, before it. There’s a bigger focus on downside protection, especially with a big systemic crisis. But the crisis has also exposed new opportunities. Asset managers are starting to look at how Covid-19 has fundamentally affected the way we live and how it will continue to do so in the future.

Outperformance often cannot be attributed to one single factor. Growth equities, for instance, do not always outperform value, and value does not always outperform growth. However, investors can recognize tendencies and align themselves with them.

Long-Term Success

As the market is more aware of the performance potential of a specific factor, they will integrate that a lot more. The key to long-term success will be the ability to adjust to the changing circumstances. And that's no different for ESG.

One of the many positive aspects of ESG investing is the range of possibilities. Some people focus on their portfolios on exclusion, others on engagement, or on taking positive views on how the world is going to change. There are multiple ways to do sustainable investing, but there are some common denominators that have led to an average outperformance for ESG strategies, specifically within equity investments.

ESG Qualities Beat Sectors

First of all, most sustainable investors have little to no exposure to classic energy: fossil fuels like oil, gas, coal. All these sectors have underperformed. Because of the pollution potential, many also have little exposure to aviation and resulting sectors or similar sectors like tourism. And because of the systemic risk that big banks still pose, many sustainable investors also have underexposure to financials.

From a sector point of view, that has contributed positively during the crisis. And to a large extent, over the last couple of years, those were also sectors that had been underperforming before the crisis.

More Demand

Many sustainable strategies also have a significant exposure to IT. One of the consequences of the COVID-19 crisis is that there's more demand for the online economy and working from home, so big parts of the IT sector are actually benefitting from that. Sustainable investors typically also have an obvious exposure to healthcare, which also has done very well during the crisis.

But beyond sectors, sustainable investors have tended to pay closer attention to the overall quality of companies, too. That means looking at companies that don't take irresponsible risks in general, relative to nature and social risks, but also those that typically don't take significant risks with their balance sheets, by taking on too much debt, for instance. So, those types of quality companies have provided downside protection too.

Multitude of Factors

In short, the success of ESG investments comes with a multitude of factors. However, the direction in which the financial industry must move is clearly defined. And in the future, there will simply be no way around ESG.

For professional investors only. All investing involves risk, including the risk of capital loss. This material is provided for informational purposes only and should not be construed as investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of services. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. The views and opinions expressed are as of the date indicated, and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted. In Switzerland: This material is provided by Natixis Investment Managers, Switzerland Sàrl, Rue du Vieux Collège 10, 1204 Geneva, Switzerland or its representative office in Zurich, Schweizergasse 6, 8001 Zürich. MIROVA - an affiliate of Natixis Investment Managers – French Public Limited liability company - Share capital : €8,813,860 - RCS Paris no. 394 648 216 - Regulated by AMF under no. GP 02-014 - 59 Avenue Pierre Mendès-France, 75013 Paris - www.mirova.com