article

Should we still talk about ESG?

The last few weeks brought about enormous changes to our society, to our personal lives and to the economic environment as we know it. The spreading of a deadly virus across the world prompted many governments to put out unprecedented restrictions on businesses and the wider population, while at the same time trying to support their economies via aggressive monetary and fiscal policies.

Financial markets have responded aggressively, selling off across risky assets and offering little shelter from volatility. Businesses with a strong ESG framework have not being immune from the sell off, as illustrated by the performance of MSCI World ESG leaders vs MSCI World.

This is not surprising given that the recent market moves have been driven by panic and fear of the unknown, and in those situations we rarely see investors differentiating between companies on the basis of their financial or ESG quality. But what can we say about the more lasting impacts of the virus, both on global economies and for ESG investors?

The Economy

It is reasonable to believe that the impact of COVID-19 will be temporary: if the measures being implemented slow the transmission rate and eventually defeat the virus, if new drugs currently being trialled are found to be effective in lowering the mortality rate, or if a new vaccine is created in the next 12 to 18 months. Meanwhile, governments will have to support society and the economic system that sustain it.

Today, governments are (in the majority of cases) acting to support liquidity to the system and are doing it in ways that in the past have been considered to be unconventional. Even in the depth of the global financial crisis, the idea of “helicopter money” was never implemented but today the US is planning to distribute cash directly into individuals’ bank accounts, and only yesterday, South Korea announced a voucher scheme to make direct payments to households.

Longer term, these shifts could mark a longer lasting shift in perspectives over the range of policy actions available to governments, for implications for global economies. Paying attention to these developments are likely to be far more important than focusing on near term macro data, much of which cannot be interpreted through the same analytical lens as previous downturns.

Looking Longer term: The UN Sustainable Development Goals

Much of the emphasis behind ESG investing is driven by a desire to look beyond the short-term results that dominate market commentary and frequently.

Paying attention to issues like quarterly GDP, monthly inflation rates, or weekly market returns can be important, but also distract us from thinking longer term. Perhaps a period in which such data provides even less insight into the genuine underlying picture for the global economy will serve to recalibrate time horizons.

From this point of view, the UN Sustainable Development Goals provide a good framework for determining what should be at the forefront of the political, social and economic long-term agenda.

Focusing on those longer term goals can lead to a better outcome for stakeholders in society. It is also the case the dealing with the coronavirus and its impact may accelerate moves to tackle some of these long-term issues, with potential impacts on the prospects for related companies.

These pressures being faced by society and governments at present may come to bear on three of the goals in particular: number 3 (‘Health and Well-Being’), number 8 (‘Decent Work and Economic Growth’), and number 12 (‘Responsible Consumption and Production’).

UN Sustainable Development Goal Number 3: Good Health and Wellbeing

Before the pandemic crisis hit, the health system in many countries was already operating close to its full capacity, both in terms of infrastructure and personnel. While widespread access to healthcare has never been more important. Public and private spending will need to contribute to rebuild capacity and make it more adequate to current demographics. This could support companies operating in the health sector like medical equipment producers, diagnostic, health insurer and others.

UN Sustainable Development Goal Number 8: Decent Work and Economic Growth

Today more than ever, we realise the importance of social safety nets and emergency liquidity measures for businesses. It is by supporting business and employers in this difficult time that we protect future economic growth. Governments and central banks spent the last few weeks trying to identify the most efficient measure to do so, including less conventional ones.

UN Sustainable Development Goal Number 9: Industry Innovation and Infrastructure

The last few weeks have changed the way many of us work, shop and communicate. The role of technology and infrastructure have been critical in how we have dealt with the virus.

The ability to communicate and coordinate action, the ability to work from home and deliver essential goods and services, and the ability to shift economic activity from areas that are shut down to those in need of extra resource are all areas that we would have been unlikely to have managed in the same way even ten years ago.

These developments are indicative of very rapid change. Many of us are likely to maintain some of those new habits in the future, boosting internet usage, and the need for fast and efficient networks (like 5G). Innovative telecommunication business and IT specialists are likely to continue benefiting from this trend.

UN Sustainable Development Goal Number 15: Life on Land

Currently, there is still no certainty on how exactly this specific coronavirus transmitted from animals to humans. However, the destruction of natural ecosystems and related challenges to biodiversity are likely to have played an important role in generating transmission across different animal species and eventually to humans. Maintaining the delicate balance betweenhuman beings and nature will continue to play a key role in the years ahead in protecting society from further pandemics and I expect public and private entities to boost the efforts in this area.

UN Sustainable Development Goal Number 16: Peace, Justice, and Strong Institutions

The current status also reminded us of the important role of institutions in our society, from looking after our health to enabling our economy to thrive. While the recent rise of populism had challenged the role of our institutions, the levels of intervention, coordination and cooperation needed today remind us of the importance of strong institutions.

In this context, it will be interesting to see the impact this historic moment will have on the European Union. On one had it offers the possibility of the co-ordinated fiscal activity that some have been crying out for. On the other, steps to close borders and limit movement have been taken on a seemingly unilateral basis (at least temporarily), in opposition to the ethos of the European project. On the face of such a huge test, will Europe become more united or will coronavirus mark the end of the Union?

Conclusion

Heightened volatility naturally tempts us to think short term. And yet there is scope to believe that some of the challenges that we are facing today could well prompt a refocusing of attention to those goals that are important for the longer term.

While the narrative and price action of the last few weeks might seem far removed from the long-term themes of sustainability and ESG considerations, it may well be the case that such themes become even more relevant today. Rather than something that should be put ‘on hold,’ considering today’s challenges from an ESG perspective could well provide us with a framework to identify future investment opportunities, while making our society and economy more resilient.


The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.