COVID-19 and ESG – Why it is Important for Asset Managers

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Introduction

Financial sustainability is the central focus for all businesses and individuals in light of the COVID-19 pandemic. This has also required the Wealth and Asset Management industry to stringently scrutinise the Environmental. Social and Governance (ESG) agenda in the current and future investment strategy. Many companies believe that the attention towards ESG integration can be delayed amid to the current crisis, but experts would disagree because they view that the pandemic is the catalyst to push businesses to dissect their business model and values like never before.

 

ESG is Profitable during COVID-19 Crisis

Recently, the European Union has hired BlackRock which is one of the largest investors in the world with over $7tn in assets under management on 31 December 2019 prominently in the financial services and fossil fuel companies to conduct a research on the ways partnerships and alliances could encourage the integration of ESG issues into its banking supervision. The biggest percentage of assets under BlackRock’s management are in products that track equity and bond indices; hence they control large stakes in many of the world’s biggest companies. This means that verdicts made by European banking regulators on ESG issues will pay a substantial impact on significant number of companies under BlackRock’s portfolio.

In March this year, records have shown that responsible or sustainable investments outperformed other conventional investments up to 5.7% when markets are heavily impacted by the current pandemic. Asset managers should now start making important decisions pertaining ESG. What asset managers should learn from this is that ESG integration is not only vital to ensure long-term sustainable business resilient, but also provides great opportunities during volatile periods. ESG integration would open up doors to more innovation, and targeted solutions that are meaningful and purposeful when conventional investments would not.

 

What is Expected from Asset Managers?

Asset managers that are advanced in incorporating ESG into the investment portfolio are in the advantage in identifying companies that will outshine others during and after the COVID-19 pandemic. Asset managers would need to dig deep on how companies embed ESG into their business models, including in supply chain management, to evaluate better of the imminent effect of the current pandemic crisis and eventually predict the long-term impact on the companies. According to a paper by J.P. Morgan Asset Management (JPMAM) and BNP Paribas Asset Management that studied on the evaluation of the importance of ESG integration in companies operations, apart from better financial performance, companies that have invested in human capital management prior the COVID-19 crisis have showcased greater resilient during the pandemic compared to its peers.

There is a high possibility that asset managers that are not equipped with ESG expertise and guidance will be left behind.  From the investors’ perspective, it is much likely that from now on they will reevaluate the affiliation with the companies they invest in. ESG issues and its impacts to all stakeholders in the long run will be further considered and not just focusing just on short-term financial returns. Though that ESG is relatively ‘new’ in the current overall investment trend, it has certainly getting traction each year and coupled with COVID-19 pandemic (and other ESG issues), this will eventually be the new norm in the market. In his opening keynote speech, the State Street Global Advisors CEO, Cyrus Taraporevala had confirmed this. He also predicts that in the next decade, ESG integration in the investment market would be seen as the mainstream strategy rather than an alternative.

Another lesson we could take from COVID-19 crisis is that digitalisation is key for the future. Advanced technological infrastructures have now been pushed to a greater extent as means of engagements. The pace of sustainable investment would demand in robust ESG data and analytics to be a vital part of asset managers’ tools and investment decisions.

Asset managers should examine the alignment of ESG of the overall corporate goals of companies. According to the World Economic Forum survey, 61% from 20,000 emerging leaders view business models must only be pursued if it creates positive financial as well as societal impacts.

Asset managers must start (if they have not yet) looking at companies’ ESG ratings or social index scores on their financial performance and credit rating. This should form one of the compulsory components in investment decisions. Asset managers should evolve to be a well-rounded ESG expert that furnish their portfolio with ESG risks and opportunities.

Though the world is focused on COVID-19 issues, this certainly does not mean that asset managers should swift their attention away from other pressing ESG issues; climate change in particular. The impact from climate change should be as or if not, more severe compared to the COVID-19 pandemic. Hence, asset managers should keep up and equipped themselves on their positive and negative screening skills to ensure the vision to invest in companies that would persevere or even be in the advantage when climate change has extended its impact to businesses worldwide. They need to be able to identify the companies that embrace low carbon economy, circular economy and renewables and should be able to distinguish with those that are currently and are very much likely to be under ESG scrutiny.

This being said, asset managers should also anticipate to engage or be engaged with various unfamiliar groups of stakeholder as well as fresh capital allocation issues. Asset managers will be expected to cater their investment from specific ESG issues that are unique to the companies, industries as well as regional presence.

Conclusion

Asset managers of the future would function similar to the present; to achieve maximum profit and generating long-term fruitful returns. However, the only difference is that they would need to incorporate ESG not merely to remain resilient, but as the new norm to create sustainable long-term value.

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation