Why Right Now Is the Time to Consider ESG
Original article by Blaine Townsend, CIMA, executive vice president and director of sustainable, responsible and impact investing at Bailard, Inc. Access the entire article here.
From WORTH, The COVID-19 Reset: Why Right Now Is the Time to Consider ESG, Article from June 4 2020.
Conventional thinking works. Until it doesn’t.
Individuals who incorporate socially responsible (SRI) or environmental, social and governance mandates (ESG) into their investment portfolios already know this. Their approach to the capital markets and wealth creation has been uncoupled from 「conventional」 investing five decades ago.
Inherent in its design, SRI/ESG strives to achieve financial, social and environmental goals - not to sacrifice one for the other.
In fact, recent research from Bloomberg Intelligence and BlackRock shows that during the stock market sell-off that began in March of this year, ESG and SRI funds saw fewer drawdowns and had better performance.
As the economy reopens after the COVID-19 pandemic, the goal of SRI/ESG should be embraced: Get capital to those who need it most, and then align economic growth with the well-being of employees, the community and business alike.
How? It’s time to break out the ESG investing playbook.
Strive to Balance Financial, Social, and Environmental Outcomes.
This can be done. SRI/ESG investing is growing rapidly and now accounts for one out of every four investment dollars in the United States (over $12 trillion). ESG investors want to direct capital where it will have a positive impact on society, and they want to align their portfolios with a more sustainable economic model.
And ESG does not hurt long-term performance. A 2015 meta-study of over 2,000 empirical studies concluded the same thing over the long term: In 90 percent of those studies, ESG either helped or did not have a negative effect on performance.
As the world enters a post-COVID-19 reset of the economy, balancing social well-being and economic growth should not be seen as mutually exclusive. Nor should the support of traditional industries along with more sustainable, forward-looking ones.
For example, the proliferation of investment strategies focusing on low carbon speaks volumes about where ESG investors are directing capital. In fact, that might pay greater dividends for society in the long run. Green energy think tanks report that for every $1 million received from stimulus money, green energy will create 13 jobs versus just five for traditional oil and gas.
Studies have also shown that the cost of capital is lower for companies that score well on Corporate Social Responsibility (CSR) metrics.
As companies move into the phase in which employees return to a COVID-19-wary environment, it is likely that companies that score well on ESG will accomplish workplace reentry better than those that do not. These companies communicate better with their employees, garner more goodwill from their employees and have already emphasized more flexible and safe workplaces. ESG calculus already takes these traits into account when making long-term investments.
Unsustainable Growth Is Not Really Growth
SRI and ESG investors (by and large) have eschewed the idea that stretching supply chains around the globe for ever higher profit margins is sustainable. In fact, ESG saw long-term investment risk in this model.
Conventional dogma, on the other hand, said higher profits beget more wealth creation and, in the end, justify the means. And then $17 trillion of that global wealth was wiped out in two weeks, the supply chain snapped, and a massive supply-side shock hit the system.
Conventional thinking works. Until it doesn’t.
ESG Is an Evolution, Not a Revolution & Perfect Can’t Be the Enemy of Good
The fact that non-traditional risk factors like climate change, water and access to health care have become widely accepted as real risks to financial and business returns thanks to ESG investing makes sense. It is based on empirical observation, not emotional reaction.
The fact that companies that treat their employees better and have good brand reputations may garner higher valuations than peers is based on the value of intangible assets in investing - which has become more relevant in today’s highly competitive and disruptive world.
Conventional thinking works. Until it doesn’t. ESG investing should no longer be seen as unconventional.
And then $17 trillion of that global wealth was wiped out in two weeks, the supply chain snapped, and a massive supply-side shock hit the system.