Green Finance Advisor of Friends of the Earth (HK) / 香港地球之友綠色金融顧問
March 2020 will go down in history as one of the most intense and sharpest sell offs people have ever experienced due to the Covid-19 outbreak worldwide. The MSCI World stock index fell by 14.5 per cent, meanwhile, according to Morningstar, 62 per cent of global environmental, social and governance-focused large-cap equity funds outperformed the benchmark. In hindsight, it would be interesting to backward-engineer the reasons behind the outperformance amid the public health crisis, which may shed more lights on how investors should perceive ESG investing, especially for “S”, which the traditional financial analysis used to understate its importance.
On top of the consideration of companies’ financial strength by ESG strategies given its quality bias, the enhanced risk management framework with the outright focus on ESG factors could have aided companies’ performance the difficult market environment. The pandemic has underlined the importance of disaster preparedness, continuity planning and employee treatment through benefits, as they would determine whether a business can continue its operations amid the lockdowns and social distancing, posing important implications for their performance. Meanwhile, many companies such as HKTV and other MNC also manufacture medical supplies, it highlights the role that private companies could play in addressing social problems, demonstrating that corporate reputation has been strongly positively correlated to financial performance.
Most importantly, the vision behind ESG investing rides on how the economy is being reshaped at the moment in order to accommodate the public health crisis. To combat the spread of the coronavirus, the global economy is severely impacted with the regional lockdowns and social distancing in place. The changing backdrop highlights the importance of sustainability and companies’ ability to adapt to changes in the societies to which they belong, as none of the companies can completely shrug off the impact from social or environmental changes. It is natural that ESG would outperform as sustainable investment takes into account the future and positive social impact, this manifests itself in the growth of the telecommuting company “Zoom” which many of us may be using now when considering the social benefits it delivers.
A wide range of social and environmental issues will reach their critical points in the coming decade, such as climate change, political stability and the future industrial revolution driven by technological advancement. Companies’ fortunes will hinge on whether they can weather these disruptive challenges in future. From investors’ perspective, as we can envisage that the increasing risks stemmed from environmental and social issues would be moving up corporate agendas to drive long-term development plans, we have to examine companies and identify winners among them.