This brief commentary from the wealth management arm of HSBC argues that the virus underscores the rationale for sustainable investing and ideas such as ESG approaches to managing money.

The global pandemic has affected a number of the prominent “big themes” in wealth management in recent years. One of them is the trend for environmental, social and governance-themed investment. And no wonder: COVID-19 hit flights and transport, affected workers and business owners in dramatically different ways (some have been frantically busy, others were furloughed); the controversy over the origins of the virus, and China’s handling of it, certainly puts governance in the picture. How governments and companies have communicated their policies is another big governance matter. And the way the virus may have started from “wet markets” in China and been transmitted has made people think afresh about how we obtain and process food. In short, COVID-19 has a lot of ESG implications. 

To discuss this area is Jan-Marc Fergg, global head of wealth products and investments, wealth and personal banking, HSBC. The editors are pleased to share these views and invite responses. Jump into the conversation! The usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

With many of us spending lots more time at home, the global pandemic has triggered a deep reflection about how we can change the way we live. The immediate climate, social and economic impacts of COVID-19 have been very visible across the world; ranging from the positive environmental impact of fewer people travelling by air and road reducing global CO2 emissions, for example, to the negative economic impact felt by some of society’s most vulnerable communities.

While COVID-19 has disordered lives and disrupted the world’s economies and financial markets, companies with better ESG (environmental, social and governance) credentials have undoubtedly exhibited more resilience in the downturn.

This has prompted some people to reflect on how they live and ways to personally shape the future they want. For some investors that has meant rethinking their relationship with their investments and the impact their portfolios are having on the planet or to communities across the globe. There are different ways for investors to do this; one way is to incorporate ESG-themed investment products into their portfolio or to exclude companies deemed to be damaging the planet or people.

Some investment products focus on ESG concerns and seek to achieve a positive environment or societal impact, alongside competitive financial returns. Various studies have examined the link between three key factors: ESG performance, corporate financial performance and share price performance; most concluded that companies with better ESG scores were more likely to show higher returns over the longer term. In times of market stress, it’s important for investors to get resilient performance in their portfolios.

Since the start of the COVID-19 pandemic, companies with higher ESG scores have out-performed companies with lower scores. Recent studies have also seen larger sums of money being invested into ESG-themed exchange traded funds in the first two months of 2020, reaching $14.30 billion, far higher than the $2.4 billion gathered in the same period in 2019.

A key part of a sustainable investing strategy is to look at how companies serve society and what their actions may mean for the future. Those with high ESG scores tend to have better corporate governance and therefore reap the advantage of long-term resilience planning. When crises emerge, particularly those which have severe social and environmental implications like COVID-19, investing in ESG-minded companies can act as a defence for a portfolio while giving investors a meaningful outlet to align their money with their values and hopes for the future.

Companies that can create value for all stakeholders - employees, customers, suppliers, the environment and wider society - are more likely to succeed in the long term and hence deliver higher shareholder returns. How companies respond during this crisis in supporting their employees and customers will have important implications on their future performance. Those which do it well, are likely to have higher ESG scores with the potential to deliver stronger returns for investors over the long term.