The events of the last few months have challenged how economies function, households consume, and businesses operate. COVID-19 is the type of event that accelerates change. We expect capital markets will allocate capital toward the businesses that are positioned to benefit in the new landscape. Environmental, Social, and Governance (ESG) practices are at the forefront of this landscape.
For ESG investing, the “E” has come into focus given the consequences of climate change that are already present. The “G” is almost a given as shareholders clearly expect effective governance of their companies. Today, there is an increased focus on “S” as social issues have been brought to the forefront during the pandemic. Businesses that within their financials means focus on long term security among employees, communities, and customers may find much greater resiliency in weathering the current climate than companies who are not best in class in these areas. We expect more proactive commitments to ESG best practices among leaning companies
From a portfolio point of view, we have found that investment managers who use ESG factors in their investing process have outperformed their broader peer set historically (Exhibit 1). Active ESG funds are both overrepresented in the top quartile of active US large cap funds in Morningstar and underrepresented in the bottom quartile of that universe, suggesting that there may be a potential benefit to incorporating ESG factors in the investment process.
