The COVID-19 pandemic has not only caused a global health crisis, but also sent financial markets into a maelstrom in early 2020. While the outbreak is undoubtedly a tragedy of epic proportions, it's also highlighted the importance of maintaining investment exposure to companies that pursue sustainable goals for environmental, social and governance factors (ESG).
The ESG investment theme isn't new. Even before the virus crisis hit, sustainable investing was becoming a hot topic with investors across the board, says Annabel Bosman, head of relationship management for RBC Wealth Management in the British Isles. "It's something that's been in the RBC ethos for a long time," she says. "Our central mantra is to help our clients thrive and communities prosper. To do that, we all believe we should focus on sustainability."
Recent experience also shows ESG stocks are more resilient during bear markets. While almost all asset prices took a beating during the initial phase of the recent coronavirus pandemic in Feb. and March, ESG investments did better than most, according to a recent analysis by Morningstar. In the month through mid-March 66 percent of ESG funds ranked in the top half of their categories.
Younger generations are influencing responsible investing
Even during the crisis, clients wanted to talk about ESG investing. "One client was interested in ensuring their entire portfolio had an ESG stance," Bosman says. "They were doing this at the insistence of their young daughter, who asked them what they were doing to save the planet," she says.
The focus of the younger generation on sustainability is a common topic in client conversations. And, according to research from The Economist Intelligence Unit (EIU), commissioned by RBC Wealth Management, 76 percent of younger* generations in the UK say it's increasingly important to consider ESG factors when investing, compared to 37 percent of older* generations.
In addition to discussing portfolio management, these talks also allow high-net-worth individuals (HNWIs) and their families to talk about how they can address their non-financial goals. Such aims may include fighting climate change or supporting social agendas. "That's quite a consistent theme that we see," she says.
ESG investing tends to outperform
While investing in companies with sustainable business practices is worthy on its own, there's a long-held misconception that doing so comes with a price of lower investment returns. That would seem to have put the daughter's goal at odds with the parent. The client had previously put off making ESG investments because they believed the performance of their portfolio would suffer. But in truth, the opposite is the case. Portfolio managers that embrace sustainability investment factors have significantly outperformed their peers.
Companies that strive to adhere to ESG principles tend to score highly on other metrics as well. "Lots of portfolios that have high ESG scores perform more strongly financially," says David Storm, head of multi-asset portfolio strategy at RBC Wealth Management in London. "Invariably the companies that do well on ESG measures are better quality."
Sustainability cheaper for long-term investing goals
Until the pandemic hit, the superior financial results from companies with good ESG ratings attracted huge investor interest, pushing stock prices up and making the shares expensive.
But the recent market pull-back in most asset prices has made ESG stocks better value for long-term investors wanting to increase their sustainable investing exposure. "If you're looking at a ten-year investment horizon, they're relatively cheap now," says Stephen Metcalf, associate global manager research at RBC Wealth Management in London. In other words, now could be a rare moment to add some quality ESG companies to a portfolio.
ESG trends are here to stay
While some investment fads come and go, the trends driving the need for sustainable business practices are here for the long-term. Embracing investments in these forthcoming trends is a way of readying your portfolio for the coming changes in the global economy, Metcalf says. Obvious long-term themes include the move away from fossil fuels to renewable energy. But there's also an increased use of artificial intelligence and new technology to help care for an aging population and keep the environment clean. "You can benefit from these trends, and it allows you to future-proof your portfolio," he says.
To help align investment with your sustainability goals, Metcalf suggests going through a rigorous review process of the funds. This should include looking at quantitative ESG metrics, the aims of the funds, and how they're achieving those aims. "When onboarding new funds, we look for those with a good purpose and clearly stated goals," he says.
* ‘Younger’ is defined as people in Generation X or the Millennial generation, born between 1965 and 2000. ‘Older’ is defined as Baby Boomers or people in the Silent Generation, born in 1964 or earlier.