In this month’s video Kirsty Clark, Investment Specialist, comments on the growing focus on Sustainability and ESG issues in the wake of COVID-19, and how authorities, companies and investors have been responding.
In June, equity markets continued to bounce back from their March lows. The lifting of lockdowns, abundant liquidity, and newsflow on vaccine progress buoyed investor sentiment over the month, while better-than-expected economic activity fuelled investor risk appetite.
The MSCI AC World Index was up 3.2%, in US dollar terms, helping global equity markets deliver the strongest second quarter since 2009.
On a regional basis, Asia ex Japan was the best performer. The emerging markets and Europe also outperformed while the US lagged as a number of states paused their phased re-openings amid a continued rise in virus cases. Shares in the UK and Japan also lagged the wider market in June.
In commodities, Brent crude continued its upward climb, with the pick-up in activity supporting fuel demand. Gold also inched higher and remains one of the best performing asset classes year-to-date. Elsewhere, high yield bonds performed well and Italian 10-year government bonds rallied in response to the EU’s coronavirus recovery plan. Among currencies, the euro strengthened versus sterling and the US dollar.
At a sector level, tech stocks continued to lead the gains and cyclicals outperformed, while more defensive area of the market including as utilities and healthcare underperformed the wider market.
The Coronavirus pandemic has prompted a renewed focus on sustainability and environmental, social and governance issues. The global outbreak has focused attention on social concerns and the risks to our health and well-being.
We have also seen a reduction in carbon emissions due to economic inactivity during the lockdowns – bringing the global warming debate back into sharp relief.
As a result, one of the key questions raised in the wake of COVID-19 has been: ‘Do we build back as before, or do we recognise the current challenges to future sustainability and seize the opportunity to build back better?’
We’ve seen governments and supranational organisations increasing their commitments, with Europe leading the charge. Its recently-announced €750 billion recovery plan has been billed as the world’s largest ‘green’ stimulus.
Green initiatives will focus on home energy efficiency and green heating, renewable energy, enabling the transition to ‘clean’ vehicles, investing in the production of clean hydrogen, and boosting resources to aid the energy transition.
Encouragingly, a recent Oxford University study found that ‘green initiatives’ focused on reducing emissions, as well as stimulating economic growth, delivered higher returns on government spending than conventional stimulus spending, created more jobs and led to greater long-term cost savings.
We have also seen a renewed focus on sustainability in the corporate sector, with many companies looking to align targets with the UN SDGs. Cognisant of the growing risks in not addressing ESG issues and adopting sustainable practices, many companies have increased their commitments, and have redirected capital in line with this.
Signalling their intention to help create a ‘clean economy’, 241 multinational companies, from a diverse range of sectors (and with a combined revenue of over US$5 trillion), have committed to targeting 100% renewable energy use.
For companies combusting (or reliant on) fossil fuels, the route to decarbonisation is far more challenging. Yet, we’ve seen in the energy sector…a clear trend of cutting capital expenditure on upstream oil investments while emphasising renewable energy investment.
For example, BP and Shell have de-emphasised oil exploration and development, but retained investments in renewable energy, electric vehicle charging and bio-fuels.
For investors, businesses focusing on sustainability are increasingly being viewed as ‘smart investments’.
The 2020 ‘Global 100’ list of most sustainable companies, compiled by Corporate Knights, has consistently outperformed the MSCI AC World Index over the past 15 years, while also outperforming on a range of ESG criteria including carbon productivity, average CEO pay ratio, number of women on their boards, as well as executive pay linked to sustainability targets.
So investors are not having to forgo financial returns when investing in companies committed to sustainability. Rather, data suggests the opposite is true.
Sustainable funds have been attracting increased attention, and benefited from a surge in investor interest in 2019.
While net inflows to these funds in the first quarter of 2020 were down 27% from the fourth quarter of 2019, they were up 90% on a year earlier, and they enjoyed inflows in a quarter when risk assets experienced substantial net outflows.
If there is one positive takeaway from the COVID-19 pandemic, it is the realisation that with sufficient political will, government support, industry buy-in and public backing, actions that may have seemed inconceivable before have become a reality in the present.
Despite all the risks, uncertainties and challenges that remain, proponents of global efforts to rebuild ‘sustainably’ will be hoping the old adage, ‘never let a good crisis go to waste’, is seized upon…and that we can reap the benefits of our collective efforts to create a more inclusive and sustainable future.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.