How has sustainable investing been doing during current volatile markets?

FOR THE PAST DECADE OR SO, INVESTOR INTEREST HAS STEADILY GROWN in a different kind of investing called sustainable and impact investing, incorporating ESG—or environmental, social and governance—issues¹. ESG measures the degree to which individual corporations face risk from and/or attempt to make a positive impact in those areas. But the rise of evaluating companies with this broader lens of corporate purpose and impact on the world has occurred primarily in a bull market that came to a somewhat abrupt end in February. Now, as a result of the economic and market fallout from the coronavirus, the question is: Will a desire for what’s familiar cause this kind of investing to lose favor in a downturn? 

That’s not what the research has been indicating, believes Jackie VanderBrug, head of Sustainable & Impact Investment Strategy for the Chief Investment Office of Merrill and Bank of America Private Bank. In fact, she adds, sustainable investing might possibly be more resilient than ever. A BofA Global Research report notes that from the Standard & Poor’s (S&P) 500 peak on 2/19/2020 through 3/25/2020, stocks in the top fifth of ESG rankings outperformed the broader market by more than 5%². “What’s more,” says VanderBrug, “the same report found that stocks that ranked highly for ESG outperformed those that ranked poorly during the Q4 market selloff last year.”  

She adds, “As the world shifts around them, many investors appear to appreciate more deeply the importance of how companies do business. For growing numbers of these investors, environmental, social and governance (or ESG) considerations are no longer a nice-to-have, but a necessity.” In particular, two factors seem to be driving the continued surge in sustainable investing.

We’re seeing how business practices affect our daily lives. “If there is a silver lining at all to our present situation,” says VanderBrug, “it’s the clearer understanding that creating an economy based upon our collective well-being is critical.” She adds, “We’ve seen the results of companies’ business decisions in direct, practical ways.” That may be why, within the ESG categories, investors seem to be focusing more on the social—especially on the ways companies treat employees.³ Safety precautions, medical benefits, paid leave: all these aspects of the worker experience are receiving greater scrutiny. Many people have chosen not to patronize businesses that deny paid sick leave to its cashiers or kitchen staff, both as a matter of principal but also because, on a practical level, doing so leaves those workers more vulnerable to an illness that can be passed along. And those values and concerns may be informing their investing choices as well, believes VanderBrug.

Strong ESG policies tend to make better-performing companies. Research has shown that, historically, businesses that invest in their people—and, as a result, see high employee satisfaction—demonstrate greater resiliency in market downturns.⁴ This year, according to a BofA Global Research report, companies with strong product health and safety factors, along with worker-friendly policies such as employee leave and childcare services, have outperformed the overall markets⁵.

That could be because strong relationships with employees and organized labor may enable companies to better negotiate work restructurings, furloughs or retraining. And having a broader, more integrated talent pool may help them more quickly adapt their product lines and delivery approaches to a radically changed marketplace.

Performance could also be a major factor in the rapid growth of sustainable funds. Total investment coming into these funds totaled $21.4 billion in 2019, a nearly fourfold increase over the previous calendar year.⁶ While sustainable funds employ a number of strategies, at their heart they primarily seek companies that – through strong employee engagement, customer orientation and the commitment to communities in which they do business – may provide more sustainable cash flows and earnings over the long term.

Where could sustainable and impact investing go from here? When markets revive, how could sustainable investing be affected? “Investors should find that the pace at which risks and opportunities emerge could likely continue to quicken,” believes VanderBrug. She is of the opinion that investors will continue to pay closer attention to companies’ performance on ESG issues, with firms increasingly using that data to inform their portfolio decisions. She points to the Davos Manifesto issued earlier this year by the World Economic Forum, which noted that “a company is more than an economic unit generating wealth. It fulfils human and societal aspirations as part of the broader social system.”⁷ Whatever the market conditions, investors seem to increasingly agree with that assessment.