From global asset managers to individual investors, sustainable investment strategies have garnered unprecedented interest across the investment universe. We are still in early days, but the long-term prospects of sustainable, or environmental, social, and governance (ESG), investing are simply undeniable. ESG investing offers a unique opportunity for investors to reduce risk, while maximizing return. Furthermore, the success of ESG investing in the times of COVID-19 has the potential to accelerate ESG trends faster than even the most optimistic projections forecasted.
ESG Success: A Covid-19 Silver Lining?
The Covid-19 crisis may end up as a boon to ESG investing. In April 2020, ESG news stories surged nearly 14x compared to the same time the previous year.
While most ESG strategies are relatively new, the potential for outperformance and lower risk have driven recent interest and success. However, a legitimate and lingering concern is how ESG strategies would perform in a bear market. Enter the Covid-19 pandemic. Despite unprecedented market volatility, sustainable equity funds, on average, outperformed their traditional counterparts in Q1 of 2020.
Even before the pandemic, Morningstar reported that mutual funds and exchange-traded funds (ETFs) with a focus on sustainability attracted $20.6 billion of new assets in 2019 – nearly quadrupling the previous annual record set the year before. A continuation of strong, or even average, performance through what could be the worst recession since the Great Depression would have a profound impact on the future of sustainable investing.
At Fire Capital, we believe that long-term investing strategies that thoughtfully incorporate sustainability as part of the investment process aligns well with traditional long-term investing principles. This belief has undoubtedly helped us better navigate client portfolios through turbulent markets. From our perspective, continued positive results reconfirm that investing for returns and investing for good does not need to be mutually exclusive.
Why does ESG matter?
The world is evolving, and markets are forcing companies to change with it. In a January 2020 letter to CEOs written by Larry Fink, chairman and CEO of BlackRock, he outlined what he defined as a fundamental reshaping of finance. His letter discusses three important considerations that underpin why environmental, social, and governance (ESG) factors are important to long-term investors. These three considerations are:
- A focus on sustainability is aligned with profit maximizing behavior.
- A significant reallocation of capital is coming soon.
- Stakeholder interests must be considered and addressed.
Analysts are already predicting that some ESG factors will likely elevate in importance due to the fallout from the pandemic. More so than ever, companies will need to address concerns associated with employee health and wellbeing or face the consequences. Strong governance practices, particularly in areas such as supply chain management, will likely garner extra attention. Nevertheless, the most impactful shift may be whether markets and consumers reward businesses who willingly answered the world’s call for help when it needed it the most. A new version of market-based capitalism could be on the horizon, but only if investment performance lives up to expectations.
The information in this report was prepared by Fire Capital Management. Any views, ideas or forecasts expressed in this report are solely the opinion of Fire Capital Management, unless specifically stated otherwise. The information, data, and statements of fact as of the date of this report are for general purposes only and are believed to be accurate from reliable sources, but no representation or guarantee is made as to their completeness or accuracy. Market conditions can change very quickly. Fire Capital Management reserves the right to alter opinions and/or forecasts as of the date of this report without notice.
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