Against the backdrop of Covid-19 and the US’ rollback of environmental regulation, investment in environmental, social and corporate governance (ESG) remains a wise choice, writes Sarah Brattan Hughes, Head of Sustainability, North America, Schroders.
“We have seen sustainable investing outperform going into the Covid-19 crisis, and throughout the crisis. The resilience of results supports our view that sustainable investing is a proxy for quality.”
The recent rollbacks could potentially result in US companies laxing on environmental practices. However, the focus on sustainability in other parts of the world will help keep up the sustainability standards globally, Hughes adds.
“For example, the European Union has embarked on a sustainable finance plan and has a strong ambition to be a global leader of sustainable investing. It is a matter of time before ESG integration becomes a hygiene factor in investing; a base-line requirement for asset managers to incorporate into all investment processes.”
With additional corporate disclosures being mandated around the world, US companies will have to abide by such regulations if they want to be operating in regions outside of US, adds Hughes.
“With the US presidential elections fast approaching, should there be a shift in the White House, we're hopeful for improvements in sustainability policies as US presidential candidate Joe Biden and his running mate Kamala Harris are both advocates of environmental and climate justice.”
ESG over the years
Hughes notes how sustainable investing has evolved over the years, starting in its simplest form in the 1990s as a process of exclusion of “taboo” industries, such as alcohol, tobacco and firearms. “Since then, sustainable investing has had huge shifts in methodology; it is now a process of inclusion rather than exclusion,” she writes.
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Today, the environmental, social and governance factors are becoming increasingly intertwined, writes Hughes. “Since the onset of the pandemic, companies have been putting more focus on the 'Social' portion, such as with employee welfare. However, how well companies treat their employees is intertwined with policies that are formulated at the governance level, for example, access to management, rights of minority shareholders and capital allocation priorities.”
Such overlaps are very common now and investors should look at these factors as a whole rather than in silos, she writes.
But there are obstacles within the sector itself. Despite the perception of transparency, many passive products disclose surprisingly little about how they actually implement ESG factors, says Hughes. “Most of them rely on a single third-party ESG rating provider. Their rating methodologies typically emphasise tick-the-box policies and disclosure levels, data points unrelated to investment performance and/or backward-looking negative events with little predictive power. Most of the inputs to these scores relate to policies rather than more tangible measures of performance.”
Oversight is made easier by an active investment philosophy, where regular management meetings can be complemented by targeted engagements on specific company, environmental and social issues, she adds.
