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ESG investing and the Covid-19 factor

Ryan Medlock, Royal London’s Senior investment development and technical manager

2020 was meant to be the year that ESG went truly mainstream. The upcoming amendment to MiFID II, UN COP26 in Glasgow and more asset managers embedding ESG into their investment processes but then along came Covid-19. However, rather than putting the brakes on the momentum built, the pandemic has perhaps given ESG a sharper and more calculated focus. 

Environmental concerns

The UN’s Environment Chief, Inger Anderson, has stated that humanity has been placing too much pressure on the natural world and that failure to take care of the planet has meant not taking care of ourselves. That is a very bold statement to make but Anderson also goes on to state that it’s almost always human behaviour that causes deadly diseases that exist within wildlife to spill over into humans and to prevent further outbreaks from occurring, global warming and human impact on the natural world has to reduce as these are driving wildlife into increased contact with people.

In the coming weeks, months and years – I’m sure that we’ll see more companies and investors look at both their direct and indirect impacts on the environment in perhaps a different light. We’ve already seen plenty of positive headlines since lockdown measures were introduced highlighting the impact of reduced carbon emissions. 

Social issues under the microscope

The lockdown has perhaps given social issues more emphasis, particularly in light of flexible working practices and wider employee treatment.

US technology giants Facebook and Google have already stated that they will let employees continue working from home for the rest of the year despite having plans in place to reopen their offices shortly, reflecting a common approach adopted by many different businesses in different sectors. 

Some businesses, such as British Airways, have faced heavy criticism for slashing their workforce during the crisis. Others have been accused of putting profits before employee welfare. 

Those businesses displaying strong ESG performance during this crisis and beyond could signal that it is more naturally aligned to longer term strategic thinking. A survey by Ernst & Young conducted in 2019 highlighted that only 21% of board members believed that their organisations were ‘very prepared’ to respond to an adverse risk event.  

The G factor

Corporate governance factors include boardroom diversity/fair and reasonable executive remuneration and making sure corporate culture aligns with a company’s values and we’re going see more pressure to behave in a way which better benefits the overall society with corporate governance and social responsibility being scrutinised like never before. 

This was even the case during the early stages of the lockdown where numerous businesses, such as Nationwide and Iceland, were praised for opening earlier in the day to support more elderly and vulnerable customers. On the flipside, other businesses such as Sports Direct and Wetherspoons came in for widespread criticism for their initial reactions to the crisis. 

In a post Covid environment, businesses will invariably face more pressure to behave in a way which better benefits the overall society. This can invariably serve as a catalyst for fuelling further ESG considerations and increasing the momentum behind ESG investing.

2020 may be remembered for the year we went into lockdown, but I also think it’ll be the year we look back at as a game-changer for ESG considerations. Embracing ESG has the potential to improve financial outcomes for clients and I genuinely believe that all of the current headlines and developments are presenting advisers with a unique opportunity to engage with their clients on ESG issues and opportunities.