The COVID-19 pandemic and its economic fallout will lead to a skyward surge in sustainable, responsible and impactful investing over the next year.
The average environmental, social and governance (ESG) investing fund declined by half the decrease reported by the S&P 500 index over the same period during the coronavirus crisis.
Also known as sustainable investing, ESG comprises of three key factors. ‘E’ for ‘environment’ includes climate change policies, renewable energy usage and carbon footprint, amongst other factors; ‘S’ for ‘social’ includes workers’ rights and protections; and ‘G’ for ‘governance’ takes into account diversity of the board and corporate transparency.
I believe the pandemic will result in an upward surge in this class of investing over the next year for three main reasons.
First, ahead of the pandemic, research showed investments that perform well in regard to ESG credentials usually outperform the market and volatility is lower in the long-term.
Since the coronavirus outbreak, the most recent analysis reveals ESG funds have typically kept outperforming others.
Second, the pandemic has highlighted how vulnerable and fragile societies and the planet are.
It has further emphasised that businesses will only survive and do well if they operate with affirmation from the wider court of public approval.
In addition, it has accentuated the complexity of our world and how interconnected it is in regard to supply and demand in trade and commerce, and how these could be threatened if not sustainable.
Third, demographic shifts will back the trend. Indeed, millennials cite sustainability as their main priority when contemplating investment opportunities.
This is essential as the largest-ever generational transfer of wealth – potentially around $30 trillion – from baby boomers to millennials will happen over the next few years.
Back in January, deVere carried out a global poll that showed 77% of millennials said ESG investing was their main priority when contemplating investment opportunities.
The survey underscored that although traditional factors – including anticipated returns (10%), past performance (7%), risk tolerance (4%) and tactical allocation (2%) – are significant factors in decision-making by these millennials, they are no longer enough by themselves.
Even though ESG investing was going to reshape the investment landscape in this new decade, the coronavirus pandemic will accelerate the pace of the reshaping.
Investors are becoming more and more aware that it is possible and necessary to make a profit whilst at the same time proactively protecting people and the planet.
Therefore, they will be making investment decisions after gauging the sustainability and impact of a sector or business as this will help to better determine their financial performance in the future.
Nigel Green is founder and CEO of deVere Group. One of the world’s largest independent financial advisory organizations, de Vere does business in 100 countries and has more than $12 billion under advisement.
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