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Five ESG Implications from COVID-19

The head of ESG investing for Rockefeller Capital Management predicts the pandemic’s long-term impact on sustainable investing strategies.

Human catastrophes from the Spanish flu, Asian flu and HIV/AIDS pandemics changed the course of history. The estimated number of deaths worldwide are 50 million, 1.1 million and 35 million, respectively. Each receded for different reasons. The Spanish flu vanished in the summer of 1919 when those infected developed immunities or passed away. A vaccine contained the Asian flu and, while no cure is available, treatments have been developed to slow the progress of HIV/AIDS. According to Johns Hopkins Coronavirus Resource Center there are roughly 3 million confirmed cases of COVID-19 with over 200,000 deaths worldwide as of April 27th. We say with utmost sincerity that our hearts and thoughts go out to those impacted by the virus, and we give a special thanks to our healthcare and essential workers on the front lines. While the world awaits a vaccine, we anticipate long-lasting economic and societal impacts. Below we outline the top 5 ESG implications from COVID-19.

1.  Accelerates growth as ESG strategies outperform

The growth of ESG investment strategies are directly related to their ability to generate alpha. During the first quarter (Q1) 2020 downturn we saw ESG passive and active strategies outperform noticeably leading to record inflows. In Q1, 24 of 26 ESG index funds outperformed their conventional index benchmarks across US, non-US, developed markets, and emerging markets, according to Morningstar. For example, the S&P 500 ESG Index, MSCI ACWI ESG Leaders Index, and Russell 1000 ESG Index each outperformed their traditional, non-ESG counterparts. The results remain favorable even when looking across all ESG equity open-ended or exchange-traded funds (ETFs) in the United States with 44% ranking in the top quintile of their Morningstar category and only 11% finishing in the bottom quintile.

2. Shines a spotlight on the “S” in ESG

Companies with superior human capital practices and policies may strengthen long-term competitive advantages via stronger employee morale, customer loyalty and brand value. George Serafeim, Harvard Business School Professor, commenting on Corporate Resilience and Response During COVID-19 notes that “companies responding in a way that protects employees (avoiding lay-offs, paying sick leave), manages supply chain risk (safety to avoid disruptions) and re-purposing operations to provide solutions (producing masks, ventilators) had higher institutional money flows and less negative returns.” 

3. Underscores the importance of shareholder engagement

ESG issues continue to be important shareholder engagement topics for institutional investors. Data shows a noticeable upward trend in investors supporting environmental and social shareholder proposals. At Rockefeller Asset Management, our shareholder engagement team is actively engaging with portfolio companies around human capital management and supply chain policies. These conversations have helped inform our investment thesis by providing real-time information on how companies are being affected by and responding to COVID-19. We believe that investors will increasingly deploy shareholder engagement techniques to help drive shareholder value and catalyze positive change.  

4. Acts as a tailwind for long-term “green” policies

The International Energy Agency (IEA) warned that the economic fallout from COVID-19 could slow the transition to clean energy. Collapsing energy demand will likely have a near-term negative impact on private sector investment and falling prices on EUs emission trading scheme may decrease incentives for renewable energy investments. While this could slow near-term progress, long-term tailwinds remain. NASA revealed that air pollution - measured by nitrogen dioxide (NO2) levels - was 30% lower in March between Washington DC and Boston compared to the March average between 2015 – 2019. And European Space Agency’s Sentinel-5P satellite shows NOfalling by as much as 40% in late January and early February relative to one year ago across industrial areas in Asia and Europe. We believe that long-term green policies will continue to be enacted as the link between air pollution resulting from industrial activity and human health become more apparent. Debates in Europe and South Korea are underway with leaders working to include Green New Deal initiatives in post-pandemic recovery plans.

5. Generates concern about data security and privacy 

Johns Hopkins’ plan to manage COVID-19 and future pandemics requires: (1) Diagnostics tests for those with reasonable suspicion of COVID-19; (2) Serological tests to understand those who have developed immunity; (3) Ability to trace all contacts of reported cases. Two large tech firms, Apple and Google, announced a collaboration that utilizes Bluetooth technology to gather information from infected individuals and notify public health agencies and governments. The process known as contact tracing helps identify and alert people who have come into contact with an infected person. On one hand, contact tracing can help slow the spread of a virus and save countless lives. On the other, it blurs the boundaries of data security and privacy, a key issue for ESG analysts assessing the “S.” While resolving the pandemic may require some compromises on health privacy, we expect the topic will be highly debated in the months ahead. Understanding a company’s risk management controls will become increasingly important for investors.

 Casey Clark is Global Head of ESG at Rockefeller Capital Management 

TAGS: Mutual Funds
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