ESG: the new normal for wealth preservation
By Ivaylo Dimov, former Senior Consultant at Sancroft.
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History has taught us, time and again, that paradigm shifts tend to occur at an accelerated pace in times of profound crisis when humanity is forced to realise that the status quo is no longer viable. We are yet to assess the exact magnitude of human and economic loss caused by the global COVID-19 pandemic, though many economists already argue that we are plunging into a state of global recession. In such grim and uncertain times, the glass shell of capitalism is cracking wide open – posing fundamental questions about the role of business, money, and wealth.
The practice of responsible investment, or taking consideration of material environmental, social and governance (ESG) factors in investment decisions, has been growing for several years. Yet, it is in the midst of the current crisis, as business leaders are under heightened pressure to do the right thing, that ESG integration has not only proven its worth (yet again) but has also made it clear that it is set to become mainstream. Here are three key reasons why you should embrace responsible investment practices to ensure preservation of capital and wealth.
- Source of alpha
For active investors, ESG integration can be a key source of alpha – and that is generally true for public and private markets. Numerous studies[1] have found that “the business case for ESG investing is empirically very well founded” – companies with robust ESG management practices tend to outperform the market over the long term. One of the primary drivers is quality. Such companies have strong and disciplined management teams that maintain solid balance sheets and exercise robust governance. The other primary driver is innovation. These companies continuously reinvent their offerings in a way that often generate socio-economic and/or environmental benefits too.
Not all businesses enjoy these features, and it is likely that many will end up in a state of distress following the current crisis. For investors that pursue such special situation opportunities, there is perhaps no better time to embed ESG considerations in their transformation plans.
- Safe harbours
Recent capital markets data[2] suggests that companies with stronger ESG practices have performed better during the current COVID-19 related crisis, suggesting they are generally better equipped to withstand the pressures of economic downturn and uncertainty. Surely, their strong fundamentals help. However, these companies also share a mindset of agility and resilience built over years of developing a comprehensive understanding of risk and appreciation for stakeholder interests and concerns. These companies are built to weather any storm – continuously updating their contingency plans and standing strong to protect their people and key assets.
- Alignment of values
The last reason for embracing responsible investment is less obvious and rooted in a profound societal metamorphosis that has been taking place over the last two decades. Two very different generations (Y & Z) have been joining the workforce and accumulating wealth, with middle class growing exponentially in China and India. In fact, those two generations are now the biggest spenders on the planet – dominating consumption and driving product and services innovation. But their consumption preferences are not the only distinct feature affecting the economy and society. They are acutely aware of the risks of climate change, concerned about the scourge of plastics waste and biodiversity loss and care about social equality. They also tend to embed this set of values and beliefs in all aspects of their lives, including how they manage their money – from pensions, through investments to savings – putting pressure on financial services firms to adapt their offerings and meet the growing conviction that investments should do less harm and more good.
Sancroft has a wealth of experience in advising clients on ESG integration and reporting. Get in touch to talk about this further.
We will continue to virtually convene businesses around the most pressing sustainability challenges and opportunities, even in the age of social distancing. To register your interest in forthcoming interactive webinars please email events@sancroft.com.
[1] Most recently, in 2016 Deutsche Asset Management publish its findings of aggregated evidence from more than 2,000 empirical studies on ESG and financial performance.
[2]Based on the findings by Morningstar, S&P Global Ratings, and AXA Investment Managers