The coronavirus pandemic is hastening certain trends that institutional investors incorporating environmental, social and governance issues have been eyeing for some time.
One trend is the democratization of technology, which Catherine Flockhart, a director at Baillie Gifford, says her firm has been positioned for in certain strategies. While many point to the sudden increase in demand for tools that enable online connectivity and business continuity, the underlying physical technology is also at play.
“We’re investing in a couple of companies that have really invested huge amounts of research and development into bringing down the cost of semi-conductor chips, because we’ve long been of the view that that connectivity is absolutely critical for the global economy, and so helping emerging markets leapfrog. And we’re seeing that crystallize in front of our eyes and we’re seeing forced behaviour changes that may last for the long run.”
Those behaviour changes have far-reaching impacts for multiple ESG issues, she says. The sudden drop in demand for oil likely won’t results in a v-shaped recovery, but rather a more fundamental, structural shift in the energy industry. With the cost-competitiveness of renewable energy on the rise, investors that were already positioned to take advantage of that long-term trend may see a boon.
As well, as companies move through the crisis, scrutiny from shareholders about how they treat and protect employees is rising, according to a recent blog from the Harvard Law School Forum on Corporate Governance. Appropriate measures will depend heavily on the company in question, but failure to mitigate the spread of the virus could lead to serious longer-term reputational impacts, not to mention the potential disruption to business operations and employee health and morale.
Indeed, the current dangers of the virus are forcing companies to rethink the inherent risks in their business models, noted a blog from non-profit organization Business for Social Responsibility. “The pandemic has demonstrated that many companies might generally have identified the right set of issues but may not be prioritizing them correctly or seeing the right agendas to address them. For example, many service companies have not thought that employee health and safety was a high risk for their business.”
While the evidence for ESG performance during the coronavirus is less than a quarter old, early indications suggest certain strategies are outperfoming. The S&P Dow Jones indices indicated its proprietary versions of the S&P 500, S&P Europe 350, S&P Global LargeMidCap and S&P developed LargeMidCap indices performed better than their normal counterparts on one-, three- and five-year annualized bases. Only the S&P emerging LargeMidCap ESG index underperformed its normal counterpart.