ESG For Troubled And (Hopefully) Happier Times

Tom Burroughes

14 April 2020

A year ago the acronym ESG was so prevalent in this writer’s email inbox it seemed that the wealth management industry – and certainly the public relations industry serving it – wanted to discuss little else, with the exception of Brexit.

What a difference a year makes. Here we are just after Easter, and while the sun is shining and the weather in the Northern hemisphere is heating up, so much of our mental energy is soaked up by the grim COVID-19 pandemic. So where and how can the case for environmental, social and governance-themed investment continue to be relevant? Is it in danger of being one of those fads that only take off when the good times roll?

There are a number of answers, but perhaps one clear point from the start is that the elements of ESG, particularly the “governance” part, have all been given an edge by the virus and its associated effects. It is a horrible reason why, but it is hard not to notice that air quality in our major cities seems to have improved a lot recently. Concerns about food supplies and the quality of animal husbandry, prompted by concerns about what has gone on in Mainland China, clearly play to the “E” in ESG. People, even if they are confirmed carnivores, will want to think even more about what they eat and where it is sourced.

The use of sweeping powers to suppress coronavirus, regardless of what one thinks about their justification, are clearly crucial for the “G” factor. Civil liberties are a big “G” issue. And there are massive social consequences resulting from the suppression efforts. For example, the lockdowns highlight differences between people who live in small, cramped apartments without external space, and those who do not. It shows how working from home is a lot easier for some people than for others. In poor, densely populated areas, such as the sprawling favelas of Brazil and their counterparts in India, “social distancing” is easier said than done. Mental health will be an important concern.

What is also worth noting is that, for all the controversies that still swirl about it, global warming remains a live concern, whether one buys the full alarmist case or a more nuanced one. Species loss, degradation of rainforests, damage to coral reefs and the sheer amount of human junk that ends up in the oceans remain big concerns. Perhaps some of the worries about human population growth might be misplaced, but they haven’t gone away.

And what appears to be undeniable is that younger investors, including those from the HNW population, appear to remain concerned about ESG ways of managing money. If it turns out that ESG approaches to investing help reduce market volatility, or add valuable data to the investment process, then this discipline will gain new adherents. The coming months may show whether client reporting on ESG is up to standard. Challenging market conditions might also highlight whether there are capacity limits to ESG investing, and whether wealth managers have sufficient expertise in this area.

The ESG approach has been around for several years now and the volumes are huge. According to the Global Sustainable Investment Alliance, in 2018 the total AuM of sustainable-based investments stood at around $30 trillion (source: GreenBiz, 8 April). Between 2014 and 2018, assets under management in the US with an ESG mandate, among retail and institutional investors, grew by 16 per cent, compared with just 6 per cent in Europe. Flows into sustainable funds in the US reached $8.9 billion in the first six months of 2019, compared with $5.5 billion for the whole of 2018. Regulators such as the US Securities and Exchange Commission and the Monetary Authority of Singapore are supportive and encouraging more disclosure and reporting on ESG. (Here is an article taking stock of how large ESG now is around the world.)

Whatever happens as a result of the pandemic, this publication is confident that ESG investment approaches will be a part of the conversation for years to come. In coming days we intend to publish a number of articles and commentaries from the wealth management sector on ESG. As always, feedback is welcome. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com