In light of World Earth Day, which is celebrated annually on 22 April, there is an increasing focus on taking action against climate change. Amidst the COVID-19 pandemic, there has been an unexpected return of blue skies to parts of China and improved visibility of the majestic Himalayas in India. In South Africa, Kruger National Park has shown images of lions that have come out of hidden reserves where they tended to seek relief from heavy traffic and streams of tourists, with similar reports coming out of the US.
As we celebrate the 50th World Earth Day, nature is truly reaping the benefits of its break from the toll of human consumption and activity. There is also evidence that companies that are considerate of the environment and the socio-economic contexts they exist in have outperformed their peers. According to Jon Duncan, Head of Responsible Investing at Old Mutual, while the outbreak continues to threaten global growth, leaving many sectors vulnerable — as reflected in the news that oil prices fell into negative territory this week — environmental, social and governance (ESG) funds are showing resilience. Morning Star reports that, 24 out of 26 index funds that focus on companies with the highest ESG scores have outperformed their closest conventional counterparts.
Duncan says the COVID-19 fallout has been a good litmus test for ESG investment. “ESG funds are proving themselves to be remarkably resilient. Recent results clearly indicate that it is much more than just a ‘nice-to-have, but it is also good to have, ” says Duncan.
“Like all funds, sustainable equity funds suffered significant and sudden losses of value in the first quarter of 2020 due to the global Coronavirus pandemic. However, sustainable investment funds held up much better than conventional funds during this period.”
According to Elize Botha, Managing Director of Old Mutual Unit Trusts, Morning Star corroborates findings that companies with higher ESG scores tend to outperform their direct competitors. “These are businesses that actively manage their environmental impact, treat their stakeholders well, and govern themselves in an ethical fashion,” says Botha.
“Companies with high ESG scores enjoy a stronger social license to operate, lower staff turnover, better resource efficiency, lower cost of capital, better innovation and stronger access to markets, which are proven to result in better performance.”
Both Duncan and Botha believe that COVID-19 will define the new ‘quality companies’ of the 21st Century. “In a post-COVID-19 world, at least one thing seems clear: asset managers with a commitment to ESG will be at a distinct advantage over their peers, as will investors who see the long-term value of ESG funds,” says Duncan.
“These funds will continue to deliver not only outstanding returns in the long term, but will help shift the global economy towards a lower carbon, more resource-efficient and socially inclusive direction.” As more and more consumers continue to align with the sustainability agenda, we expect demand for ‘green’ assets to grow beyond the institutional market to the retail market as well.
The numerous lockdowns and restrictions on movement implemented globally have had a profound benefit to the environment, bringing to the fore the importance of investing capital in ways that helps fix the world. With this in mind, Earth Day is a timely reminder of the importance of making sustainable choices in all areas of our lives — both on micro and macro levels — to ensure that we invest in the future today, concludes Botha.