Recalibrating for 2020: A Q&A on the Shifting Landscape for ESG Investing
July 29th, 2020 | Marija Kramer
It is clear that the perfect storm created by the breadth, immediacy and severity of the COVID-19 crisis and the collapse in oil prices has created significant uncertainty for investors going forward. Public equity prices seem disconnected with the economic outlook companies face and cannot be completely explained by asset allocation movements due to extremely low yields for the foreseeable future.
As we look to rebuild our economy, what lessons might we as investment managers and advisors learn from the COVID-19 crisis, or indeed the climate crisis and the societal crisis of systemic racism?
Crisis brings reflection, and reminder of fundamentals
As an advisory and investment management firm working exclusively on responsible and impact investing across all asset classes, we took time to reflect and assess our basic assumptions in light of recent events. COVID-19 had already shone a light on cracks in a market system that left many communities excluded from opportunities for economic prosperity, growing income inequality and the disproportionate burden of the virus. The recent deaths of George Floyd, Breonna Taylor and others highlighted again the systemic racism in our societies that handicaps black, racialized and structurally excluded communities. Calls to ‘build back better’ caused us to reflect on what we do and how we contribute to better outcomes through our focus on responsible and impact investing.
Upon reflection, our belief has held firm that market performance over the long term will ultimately be delivered by investing in companies that can deliver stronger financial performance.
Which companies are they, exactly? Those focused in markets and sectors that have better prospects for growth; those building strong sustainable competitive advantages, often referred to as economic moat; those focused on meeting the United Nations’ Sustainable Development Goals, where $2-4 trillion of capital is needed annually; and those with greater resiliency to withstand and absorb shocks, recover and still carry on. These are companies that have invested in building trust, goodwill and shared value with their many stakeholders – employees, suppliers, customers and communities. They embedded resilience in their systems, their operations and even their capital structure, when times were good.
A key role for advisors
As investment managers and investment advisors, most of us are being called upon to reassure and comfort clients; the value of that trusted professional advice in an uncertain world is heightened. A good starting point is reminding clients that investing for the long term is still a sound strategy, but this is not enough. We need to communicate the benefits of investing for impact as a solution.
Specifically:
- Investing in companies which are helping to create a better world through their products or services, and their operations, will enhance the prospects of sound financial returns and avoid unnecessary risk
- There are companies to invest in but it takes effort, research and diligence to separate out those that are genuine from the pretenders
- How and where you allocate your capital is a tool for expressing the values that are important to you, just like where you give, what you support and where and what you buy
Confirmed by recent momentum
Evidence seems to indicate that this shift is already happening and accelerating. When we look at the data from QI 2020, we see two material trends: more capital is flowing to funds that are ESG focused relative to 2019 and there is growing evidence of a positive association between ESG-focused investing and performance. [1] We believe these are long-term secular trends because they are being driven by many underlying shifts and many players in the global markets.
In fact, we expect that, in their quest for sustainable long-term returns, more investors will deepen their focus and move along the continuum from ESG to responsible and ultimately impact investing. That is why we responded to specific client requests and launched two impact funds in June that provide the market with a multi-asset class and a global equities impact investing option*.
The purpose of wealth creation through investing is to deliver prosperity, enjoyment and well-being to clients. We cannot deliver these benefits to these clients if we ignore how the money we invest is used by the companies we invest in. If we are to deal with the crises we face, be it climate change, COVID-19 or systemic racism, we must rebuild better by shifting more money to responsible investing. Now is not the time to change course but to double down – to make sure we are not driven by a desire to relive the past but instead build a better future.
*This does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or any other product or service offered by Rally Assets. Rally funds are available to accredited investors only. You should consult your investment advisor or other appropriate professional regarding your specific situation.
Sources:
[1] https://www.morningstar.ca/ca/news/202180/canadian-esg-funds-grew-faster.aspx
https://www.blackrock.com/corporate/about-us/sustainability-resilience-research
RIA Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.
Author
Upkar Arora
Chief Executive Officer
Rally Assets
