Crisis, what crisis? The coronavirus pandemic has certainly thrown a proverbial spanner in the works for financial markets. It wasn’t that long ago stockmarkets were hitting fresh record highs. It’s all brought things down to earth rather sharpish with investors’ portfolios having taken a good old hammering with people are reassessing their investment risk appetite.
Now Environmental, Social and Governance (ESG) might be a bit of a mouthful and akin to a minority sport for many as regards the criteria behind it all, but can you avoid it as an investor? The short answer might well be ‘No’, notwithstanding that by applying such criteria your investment universe could be reduced.
The ESG arena, which has been on the rise over recent years, and Responsible Investing (RI) - an overarching approach taking into account important aspects of ESG - are no longer the preserve of “sandal wearing, lentil-chewing lefties of the 1960s” as financial advisor Filip Slipaczek once remarked.
Morningstar, the investment research and data firm, reported this February that European sustainable funds saw record inflows of €120 billion ($132bn) during 2019 and funds in Europe applying ESG criteria into their strategies grew by 56% last year to €668bn. Over fifty of the 360 funds started last year had a climate-oriented mandate and overall the number of ESG funds based in Europe rose to 2,405 in 2019 (including 105 new offerings launched in Q4).
Moreover, investing along ESG lines could see a further boost from the health pandemic with the crisis having highlighting the importance of financial market risks that fit within the realm of ESG factors - spanning disaster preparedness and health risks.
That is the view of Maarten Bloemen, a portfolio manager at Templeton Global Equity Group, part of Franklin Templeton, amongst others. Similarly to disruptions resulting from climate change, an “even greater need” for companies and investors to focus on ESG themes could now be on the cards.
Bloemen, who leads the Sustainable Investing (ESG) efforts at the investment house, commenting said: “The pandemic has emphasised the importance of ESG factors, as we have seen evidence that companies better prepared to manage these risks are likewise weathering the crisis better. We think the coronavirus crisis could draw even more attention to this space and bring more flows into ESG-focused funds.”
Citing strong disaster preparedness, including supply chain management and business continuity planning as “a hallmark” of the crisis, Bloemen argued that recently highlighted ESG considerations will be seen “more acutely on the radar of investors.”
Retail Investor Perspective
Slipaczek, who is one of the few triple-Chartered Financial Planners in the UK and assessed annually by the ISO 22222 standard, remarking this May on the landscape said: “Those clients that have bespoke fund-picked portfolios with an ‘overweight’ stance in ethical funds (ESG) have seen their portfolios relatively unscathed in the recent market downturn. Fund houses to look at are Royal London and Liontrust as regards sustainable fund ranges.”
He added: “The average ethical client [retail] at Slipaczek Chartered Financial Planners with a predominately bespoke ESG portfolio has seen a fall of less than c.10% over a past 12 week period [to 4 May]. This can be considered favourable when compared to the standard indexes in these unique unforeseen and surreal market conditions.”
While other issues previously on the backburner due to the coronavirus like climate change “will likely come back to the spotlight as this is a long-term structural issue which will need to be addressed,” said Bloemen, who is based in Toronto and earned an M.E.S. in environmental studies from York University.
Acknowledging “different approaches” to ESG analysis, he nevertheless pointed out that “monitoring these issues can provide valuable insights that balance sheets or other financial metrics do not reveal and help identify potential risks or vulnerabilities.” (Note: For some other valuable insights one might wish to read ‘Business Perspective Investing’ by Roger Lawson, the ex-chairman of UK ShareSoc).
With the current crisis highlighting some of these factors, many are looking for potential investment opportunities in the health care sector including from the race to develop vaccines. But it does not stop there.
“The coronavirus has brought a spotlight on several issues in the ‘S’ category of ESG, including social stability, employment, infrastructure, data security, and keeping employees and customers safe - whether they are physically interacting or not,” said Bloemen. “Investors may find the strength of ESG practices in this area something to consider - not only as we navigate the current crisis - but also as we think about the next potential crisis.”
Climate Change Initiatives - Delayed - Not Derailed
While climate change initiatives might have been delayed, they are “not derailed” according to the portfolio manager, companies still needed to prepare for it. “There has been much talk about potential delays or derailment of climate change initiatives due to the coronavirus crisis and the heavy government spending to combat the economic impacts of the global lockdown,” said Bloemen.
“While some of these initiatives will inevitably be delayed, we think governments will largely renew and increase commitments once the current crisis ebbs. They may even allocate some coronavirus-stimulus funds to ensure a more sustainable economy longer term.”
Furthermore, he believed that efforts to battle climate change may bolster the manufacturing and construction industries, thus creating new jobs. “As active investors, we have seen some potential value opportunities in companies exposed to attractive long-term growth tied to climate change initiatives,” he said.
In view of the importance of the auto industry to major economies throughout the world, he posited that governments are likely to support the growth of electric vehicles and clean energy going forward. This included the expansion of electric vehicle (EV) battery charging infrastructure. “We also anticipate continued investment in smart grid infrastructure to integrate growing clean energy generation, and commercial and residential building energy efficiency renovations.”
He noted too evidence of this push towards clean energy globally. For example, China’s State Council extended subsidies early this April for EVs by up to US$3,525 each and an exemption from the 10% purchase tax. Add to that the UK’s recent budget targeting EV charging, extending EV subsidies and tax incentives as well as the European Green Deal, the European Union’s ambitious bid to transform the 27-country bloc into a low-carbon economy.
Such environmentally focused efforts create jobs too , evidence for which is supported by research from the World Resources Institute, who have indicated that for every US$1 million invested in building retrofits creates eight full-time jobs in the US and every US$1 spent in public transportation creates US$4 of economic activity.
On long-term investing opportunities, Bloemen revealed: “Our team is excited about companies in the renewable energy sector, and those that manufacture parts for those industries. Solar power developers, particularly those in India and China, have made good progress with their product pipelines and could provide significant earnings growth for several years.”
The recent market sell-off has presented “higher-growth opportunities” in the solar energy equipment space according to the investment house. “As prices have fallen for equipment, we’ve seen a significant increase in solar installations, also tied to regulatory and economic factors,” he said. They also expected growth trend in US solar market (+23% in 2019 vs. 2018) to continue. Carpe diem.
More information on the approach of Franklin Templeton to ESG can be read here.