Covid-19 and ESG investing – a driver of permanent change?

Since the outbreak of Covid-19, there has been a renewed interest in more responsible and sustainable investment funds.

One outcome has been a significant increase in the amount flowing into funds that explicitly take account of environmental, social and governance (ESG) criteria, alongside conventional financial metrics.

This growing trend has been on the back of a relatively strong performance from the ESG sector, particularly when compared with more traditional non-ESG funds. ESG funds have generally benefited from having less exposure to fossil fuel companies in the oil, gas and mining sectors — many of which were affected by falling oil prices in the wake of global lockdowns and economic downturns.

This shift of ESG factors into mainstream investing is set to be supported by legislative changes, with government encouraging companies to reduce carbon emissions and invest in cleaner energy to limit the rise in temperature and tackle climate change.

These rules extend into the financial sectors: advisers will soon be required to ask clients about their attitudes towards ESG, when advising on suitable investments.

Generational impact

Younger investors are often regarded as the most environmentally aware and those driving demand for ‘greener’ products. But these changes will mean investors of all ages will be asked to consider how their money is invested and whether they want to bring ESG factors into the investment mix to a much greater extent.

Across families, older investors may want to revisit their portfolios and consider what kind of legacy their investment history may leave the next generations. Grandparents are increasingly asking whether it makes sense to invest successfully for profit if the environment suffers in the long term.

Oil companies, mining giants and airlines, for example, may have delivered good profits for investors in previous decades. The question for maintaining a healthy portfolio, however, is whether their business models will remain as profitable as the world transitions to a low carbon economy, or whether there are more exciting growth opportunities in companies tackling some of the key issues we face, including: reducing waste, cutting pollution or delivering renewable energy solutions.

The governance factor

ESG funds also consider ‘social’ issues as well as environmental factors. These might include a company’s track record on issues such as executive pay, boardroom diversity, tax policies and transparent supply chains.

More transparency for business practices

Bad business practices, for example revelations of fashion firms sourcing goods from companies using child labour, can affect brand reputation with a knock-on impact for share prices as a result of customer backlash.

The Covid-19 pandemic may have focused attention on these wider definitions of corporate responsibility, with more scrutiny of how businesses look after their employees and the communities they operate in.

It is important to remember ESG funds don’t automatically exclude certain sectors or companies, unlike some ‘ethical’ funds. ESG analysis is designed to identify potential risks and opportunities, although like all investment judgements, these may not always turn out to be correct in retrospect.

The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit with your overall attitude to risk and financial circumstances.

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