2020 – What does the global pandemic teach us about ESG investing?

Linda Zhang, Purview Investments

By Linda Zhang (pictured), CEO, Purview Investments – "While writing this piece in Manhattan, I can’t imagine what New York City would be like if it were shut down for 24 hours.” This was how I started a publication about the impact of the Covid-19 shutdown in China on the world economy and capital markets in late February. A couple of weeks later, the city entered a state of shelter in place. Five months later, my beloved city and many parts of the world are still in various states of shutdown.

In a prolonged global pandemic, one may assume the interest in ESG aligned investing being pushed to the back-burner. However, the evidence suggests the opposite. We have seen a rising investors’ appetite for ESG ETFs, more ESG products launches, and more corporations taking action to push for climate resilience and inclusive growth. 

July just saw yet another record monthly increase in asset under management of nearly USD4 billion into ESG ETFs in the US, doubling the AUM to nearly USD34 billion in the first seven months this year, according to Purview Investment’s ESG ETF database. This 100 per cent growth rate in asset gathering makes ESG products among the fastest growing segments, compared to a 5.8 per cent increase for the overall ETF industry.

ESG ETFs AUM

 

Yes, the big ETFs got bigger. The largest ESG ETF in the US is over USD8 billion in AUM, while the biggest at the start of the year was less than USD2 billion. More ETFs have become newly minted billion-dollar funds, rising from six at the start of the year to nine. The number of new launches is also rising. A recent Morningstar study found that out of 23 new ESG/sustainable fund launches in the first half of 2020, about half are ETFs. Asset allocators and platforms for advisory channels continue to drive huge flows into these ESG products. For example, 90 per cent of the top fund ESGU is held by advisers, through platforms led by Envestnet, BOA’s Merrill and Blackrock Advisory.

The rise of ESG investing in 2020 coincides with ESG performance resilience and the shifts in society’s sentiments. Blackrock, the largest asset manager in the world, recently stated that their ESG funds outperformed their traditional counterparts. The two top index providers MSCI and S&P Global, whose indices are tracked by most ETFs assets, also came to the same conclusion. ESG performance resilience has to do with the fact that ESG complied companies are often better run firms, with higher operational efficiency, and less environmental, social and regulatory risks in general. Most ESG ETFs are sector neutral to their non-ESG counterpart index, making it hard to argue for sector differences driving performance differences.

2020 is a year of awakening for social equity and inclusive growth. Covid-19 has put spotlights on unequal access to healthcare, varying ability to deal with the pandemic across race and economic communities. While many may have the luxury to work from home, others simply must work as usual or face no pay-cheques. The Black Lives Matters movement, originated in the US, has prompted renewed sense of urgency for firms taking actions to address equity and inclusivity. Nike just named a new head of diversity and inclusion. Disney announced programs to elevate shows by minority directors and producers. On the other hand, Facebook received backlash for not doing enough to stop hateful messages on social media, resulting in lost revenue from many of its corporate clients cancelling advertisements for the month of July. This demonstrates that a firm’s reputation and action indeed matter to the business’ bottom line! 

The global economic pause by Covid-19 helped slow down the green-house gas emissions significantly due to reduced travel and factory shutdowns. Yet this temporary shift in behaviour will not change our current global warming trajectory. Corporations must act to improve energy efficiency as well as reduce their carbon intensity and other overall carbon footprints. Recently, a few global firms such as Unilever, Microsoft, Starbucks and Nike announced their intention to achieve net zero emissions by 2050. Apple pledged to be 100 per cent carbon neutral by 2030. Amazon’s CEO Jeff Bezos also revealed a USD10 billion fund to fight climate change. Citi Group just became another major bank announcing plans to cut ties to finance fossil fuel industry. 

Recently, the Institutional Investors Group on Climate Change (IIGCC), announced the first ever practical blueprints for “net zero investing.” It provides a framework for asset owners and asset managers to decarbonise their investment portfolios and increase investment in climate solutions. For investors, both individual and institutional, you could and should start decarbonising your portfolios NOW. The US-listed ESG ETFs can offer a good start to this detox process. However, not all ESG ETFs would do this job equally well. In fact, despite the improvements upon their non-ESG counterparts, the vast majority of top ESG ETFs by AUM still have high carbon-intensity measures and substantial exposure to the big oil and big coal industries, according to a study at ETF.com. It is encouraging that certain newly launched ESG ETFs focus on low-carbon footprints and no exposure to fossil fuel or related industries. 

The pandemic has reminded us about the inter-dependence of human activity and the environment, the urgency to address the social and economic equity and inclusivity. It is up to us, individual investors, asset owners, asset managers, to use the power of investments to encourage and reward corporate practices consistent with the betterment of the environment and society. It is our choice to reduce our portfolio carbon footprint, starting today.

Dr Linda Zhang PhD is speaking at the etfLIVE North America digital summit in October. Please find the agenda here: https://live.etfexpress.com/north-america-2020?utm_source=etf-express&u…

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