By Marc Beattie, Chief Operating Officer at AHR Private Wealth, and Iain Ramsay, Chief Investment Officer at AHR Private Wealth
The COVID-19 pandemic has caused significant upheaval for the financial markets. Firms that once represented good prospects have fallen foul as a result of the crisis, with managers and their clients taking decisions to ensure they are not exposed to the most ‘at risk’ areas of the market. However, this upheaval has also afforded investors the opportunity to reflect on their portfolios from a very different perspective, determining whether their investments correlate with their own social and ethical views.
Before the storm
Environmental, social and Governance (ESG) investments have been part of the investment news agenda for some time now and even before the pandemic ESG investments were gaining momentum. In fact, £19bn was invested in UK ethical funds in 2019.
Driven by the extreme weather events across the globe and Greta Thunberg-inspired climate protests, sustainability and climate change has never been far from the top of the news agenda. This growing movement towards sustainability has been reflected in financial services, with more consumers wanting to save and invest in companies that have a positive impact, while avoiding those that do not meet their environmental, social or ethical standards.
In the investment world, this movement towards sustainability has pushed many companies in sectors ranging from fossil fuels to tobacco to transition in a bid to change their public image. Companies such as Shell are prime examples of firms which have radically altered their visions and plans, partly as a result of pressure from institutional shareholders, adopting more planet-friendly policies or championing diversity in their leadership teams.
Regulators were also supporting the ESG agenda before COVID-19 struck. In January 2020, Dubai’s financial regulator published its guidance on sustainable finance, while Hong Kong’s Securities and Futures Commission announced a Strategic Framework for Green Finance. The UK has also taken strides towards a more sustainable agenda, implementing reforms last year that mean pension funds now have an explicit responsibility to integrate sustainability in their investment approach.
It’s clear then, that the ESG agenda is already advancing at a steady pace. COVID-19 has only served to accelerate this trend. Not only have investors used the pandemic as an opportunity to review their current investments, and update their portfolios in line with changing views around ESG, but they recognised the relative success of ESG investments against other stocks too.
From airlines and commercial property to fossil fuels, these traditionally preferred stocks have all suffered badly as a result of COVID-19 induced lockdowns across the globe. Meanwhile, ESG investments have had an opportunity to grow from fringe players to star performers.
Where before the pandemic ESG assets were seen as a ‘nice to have’ – a symbolic nod to sustainability more than an investment that could deliver solid returns – that view has now changed. ESG investments are no longer being shelved in favour of other stocks deemed more likely to generate alpha.
In fact, the strong performance of many ethical investment classes since COVID-19 appeared has encouraged more investors to switch on to ESG options. According to Morningstar, money invested into ESG funds rose to $71.1bn between April and June 2020, pushing the total invested in these funds to over $1trillion globally.
This trend towards ESG looks only set to continue amongst investors beyond the pandemic, but consumers should remain open-minded about ESG investments and make sure they fully understand the funds they are investing in actually meet their requirements.
One of the most interesting trends we’ve observed at AHR Private Wealth has been that of investor access to ESG options. In the US, during the first quarter of 2020 80% of inflows into ESG investments were via ETFs or index tracking Funds. Whilst the convenience and low cost of such investments makes them an effective solution for investors looking to satisfy their ESG demands, it’s important investors are ensuring they’re still obtaining the best possible value from their investments and not just satisfying one criterion as a symbolic gesture. ESG, while important, should not be the sole reason behind picking a particular stock or fund to invest in.
Given the increased coverage of ESG in the press, there’s also an increased risk of FOMO-induced losses, where investment decisions are made on the back of a previous year’s high performance. But just because ESG investments have performed well this year does not mean history is set to repeat itself. A financial adviser well versed in sustainable investing can help investors cut through the jargon, complexities, and current trends of ESG and help them build a portfolio that really meets their criteria and their views.
Despite the current economic uncertainty caused by the pandemic, there is clearly a bright future ahead for ESG investing. Even before the pandemic, grassroots movements started to influence companies to review how close sustainability was to the heart of their business while encouraging regulators to begin undertaking necessary change and extra scrutiny. COVID-19 and the relative performance of ESG has only accelerated that shift towards more sustainable and ethical investing.
From climate change to the gender pay gap, ESG is set to stay firmly at the top of the agenda for investors and managers – it’s a shift that shows no sign of slowing. However, consumers need to ensure that the investments they make really do meet their criteria. This isn’t about paying lip service to a growing trend but finding options that genuinely meet the demands of investors, all while delivering returns. Ultimately, they will need a financial adviser that can help to provide them with the clarity and knowledge to ensures their portfolio continues to meet their ambitions, views and goals for the future.
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