ESG during Covid-19 – a new era for the world and investing?

  • Author : Novia Financial
  • Date : 18 Jun 2020

ESG (Environmental, Social, Governance) investing has been fighting for a long time to find its way in the world of financial management and investing. The approach has grown in popularity in the last couple of years due to not only a growing awareness of the term and education around what it means and how it can benefit both investors and the economy, but also due to companies innovating to create new products and services…

With ESG investing becoming more and more important, investors want to know that every part of their investment decision is delivering, and that includes their platform. With this in mind, we’ve now published our new ESG page. Over time we will also be adding videos and information about the ESG offerings from Fund Managers available through Novia. We are already highlighting those DFMs with ESG offerings on our DFM page and we hope that these lists will grow over time.

What has changed in society?

It might be somewhat early to see changes in all areas, or to confirm long term trends. However, as of the time of writing the lockdown has definitely brought about a shift in the way people are living their lives and moving within their communities. People have been inspired by the lower levels of pollution, less busy roads and sourcing their food from local independent farm shops rather than the supermarket.

Coronavirus has reminded everyone of the importance of respiratory health, with pollution being a major hastener of the death of millions around the world, ranking along with the likes of high blood pressure, diabetes and obesity. As reported by New Scientist, a recent study showed that the average person in Europe loses two years of life because of air pollution, and for a very significant number the years lost are considerably more. In fact, the most polluted cities have suffered more due to outbreaks of the new disease, according to a recent paper reported in an article in the Telegraph, providing evidence that ‘higher levels of some air pollutants correlates with increased Covid-19 mortality.’ It’s not hard to see why most people view climate change as at least as serious as coronavirus and want to see the world build back better.

How does this look in figures?

  • Figures from the online fitness store Wiggle showed bike sales in the UK increasing by 192% since the start of lockdown and Ebay’s figures showed new bike sales tripling in April, with sales of second-hand bikes up 23%
  • Out of 4,321 new car registrations in April the electric car models topped the list with 658 of these being the Tesla Model 3, and 367 coming from the Jaguar I Pace
  • Produce delivery company Milk & More had in excess of 25,000 new customers signing up at the beginning of lockdown

On 1 June it was announced that more than 200 top UK firms and investors have called upon the government to deliver a Covid-19 recovery plan that puts the environment first, and that ministers should use the lockdown as a springboard to a green economy. Signees of the initiative included ASDA, BNP Paribas, Greggs and Severn Trent, among many more. The proposals sent to the Prime Minister to include:

  • Driving new initiatives in low carbon innovation, infrastructure and industries
  • Focusing support on sectors that can best support the environment, increase job creation and foster the recovery – whilst also decarbonising the economy
  • Putting strings on financial support to ensure firms getting bailout cash are well managed, and in step with climate goals

Hopefully such movements are helping to encourage a way of life and business that supports more sustainable living. ESG investing should benefit from this as companies and funds with a stronger score and which lean towards ESG investing should benefit in performance.

What happened in the stock market?

Many commentators throughout the industry have asked whether ESG funds have performed better during Covid-19 and if so, why. ESG classification in the industry is still not clear cut but we can however look at which elements of the stock market that performed well and not so well over the last few months.1

The above were some of the sectors that performed the worst during the last six months. Many of these sectors are excluded from ESG positive funds through a process called Negative Screening. Negative screening means purposefully eliminating sectors that more ESG conscious clients might wish to avoid. The three above sectors are some of those most often excluded through the negative screening approach, along with travel providers such as Carnival and EasyJet.

By removing these sectors from their investment strategies, many ESG funds immediately protected themselves from some of the largest and most negative knocks on the FTSE during the beginning of the Covid-19 pandemic.

The above three sectors (if we expand ‘Offshore Wind’ to mean renewable energy) have performed well since Covid-19 hit. These are sectors that have been better protected due to their business models and their ability to continue business during these difficult times. Lots of pharmaceutical companies have seen share prices go up as a result of the increasing pressure and investment to produce a working vaccine for Covid-19. Technology companies have done well as many businesses and individuals have become reliant on technology in order to maintain some normality in everyday life, and to keep in touch with families and friends. Renewable energy companies have performed well because they are more agile than coal and oil industries, and consumers are looking towards more sustainable solutions.

There have been many that have performed above their benchmark, but here we’ll take Baillie Gifford Positive Change and Janus Henderson Global Sustainable Equity as examples of ESG funds that have performed well during the Covid-19 outbreak.

The Baillie Gifford Positive Change fund was launched in January 2017 with the aim of investing 90% of its portfolios in companies whose products or behaviour have a positive impact on society. Within their top 10 holdings are companies like Tesla, Dexcom (pharmaceuticals) and Christian Hansen who work on natural ingredients for a number of sectors. In the last three months the fund has returned 17.7%, compared to its benchmark IA Global which has returned 3.9%.

Similarly, the Janus Henderson Global Sustainable Equity fund has performed well. The fund launched back in 1991 and looks to invest in companies (as judged by the fund manager) who are having a positive impact on society and/or the environment. Some of their top 10 holdings include Microsoft, Humana Inc. (a health and well-being company), and Autodesk (design software and services company). Once again by removing the negative screening sectors such as oil and tobacco and investing in sectors like technology and health care they have been able to perform well under Covid-19 conditions. In the last six months the fund has returned 11.3%, compared to the IA Global benchmark of 3.5%.

ESG investing still has a long way to go, but now is a great time to engage in conversations with clients about this topic and what it means to them. The world has changed and we hope to continue to see people riding bikes, purchasing electric vehicles and looking to independent food suppliers once this is all over. Awareness is rising and with it will come increased competition in the market and more opportunity for great performance.

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