For many, the COVID-19 pandemic has been eye-opening, exposing weaknesses in economic and governmental systems around the world. But those in the environmental movement are unsurprised. To them, it’s clear the pandemic has simply highlighted the global issues they’ve had their eyes on for many years. As we witness this health crisis exacerbating poverty, inequality, and international conflict, we know climate change was already doing the same. And it’s becoming clear that overcoming both crises will require unprecedented cooperation between countries and sectors.
Both will also require a sea change in the flow of capital. To properly reroute capital, we must break the vicious cycle of traditional, performance-based investment that prioritizes short-term shareholder value to the detriment of the environment and society. Instead, we can create a virtuous cycle, in which capital flows toward companies offering positive social and environmental returns.
This is where investors can step in by aligning themselves with companies that embrace the virtuous-cycle concept. The pandemic-related stock sell-off presents two opportunities for investors: a buying opportunity and the chance to press “reset” on their investing approach in a way that helps to build toward a more sustainable and resilient world over the long term.
Lessons Emerge from a Pair of Crises
A series of now-famous images illustrates key lessons that COVID-19 and climate change crises seem to be conspiring to teach the world. Many of us have seen the photos of clearer skies and wildlife returning to our cities and suburbs. They tell us one thing: change is possible.
Now, we can see that with the right leadership and a clear understanding of an existential threat, people can adapt—and real change can follow as a result.
We’re seeing the same revelation in our daily lives. Despite our love of habit, the pandemic has radically disrupted the way we live and work. Adapting hasn’t been easy, but again, the clear message is that it is possible.
Fighting climate change requires big changes, too. Now, we can see that with the right leadership and a clear understanding of an existential threat, people can adapt—and real change can follow as a result.
For investors, too, old habits die hard. One of those habits is to base investment decisions primarily on past performance or quarterly earnings projections. As the world grapples with a succession of world-changing crises, holding onto those habits feels increasingly untenable. Instead, taking a long-term approach seems like a better bet, not only for the investors’ financial future, but for the future of the planet. No one’s saying adapting will be easy for investors, but what we know when we look up at clearer skies is that it is possible.
Investing in Resilience
In a survey of 200 academic studies,1 80% of the study results showed sustainable business practices can positively influence stock price performance. And while it’s still early, indexes and index funds comprised of firms that lead in environmental, social, and governance (ESG) have outperformed the general stock market during the early stages of the COVID-19 crisis (both globally2 and domestically3). There could be various reasons for this given recent unique market conditions (which have evolved over the past few months), including the relative lack of exposure to fossil fuels among these companies.
But it could also speak to the greater resilience of ESG leaders. The word “sustainability” means “ability to survive.” It’s quite possible that these companies were already thinking more deeply about how to handle a greater variety of short- and long-term risks. And that extra layer of risk screening could translate to reduced volatility during this time of crisis and uncertainty.
ESG leaders are also invested in the long-term well-being of their workers, customers, business partners, communities, and the environment in which they live.
“Doing well by doing good” is not an empty catchphrase. Beyond their shareholders, ESG leaders are also invested in the long-term well-being of their other stakeholders: their workers, customers, business partners, communities, and the environment in which they live. They support them—and can count on their support—during challenging times.
For impact investors, the stakeholder approach to corporate governance can be deeply reassuring. If you had the chance to invest in two equally well-performing companies during a global crisis, wouldn’t you choose the one that is prioritizing sustainability?
Investing in Our Shared Future
Another opportunity for shifting investments away from short-term performance is to invest in a better world—today and in the future.
The pandemic has exposed harmful weaknesses in the healthcare system and in the food supply chain. It boosted demand for technology that enhances learning, working, and healing from home—demand that may persist even after the pandemic subsides.
Now could be a good time to ask your advisor: How can I make investments that help to address these vulnerabilities? What companies are best positioned to fulfill these emerging needs? Now may also be the time to divest from companies that work against those causes.
The pandemic has left many people struggling just to make ends meet. Even the more fortunate among us—those of us with money left over to invest—can feel like we’ve lost control of our lives. Times like these serve to remind us that investing is a privilege. It’s an area where we can exert control—and effect change. It’s an opportunity to use our investment dollars to support the causes we care about.
Investors, it’s time for a reset. Even after the pandemic diminishes, climate change and other global challenges will remain. Dire predictions about where these problems will lead can have a paralyzing effect. Instead, we need to let go of fear and work together to invest in new, virtuous cycles that will help build a better world.
- University of Oxford and Arabesque Partners, From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Performance, https://arabesque.com/research/From_the_stockholder_to_the_stakeholder_web.pdf
- MSCI, MSCI ESG Indexes During the Coronavirus Crisis, https://www.msci.com/www/blog-posts/msci-esg-indexes-during-the/01781235361
- S&P Global, Major ESG investment Funds Outperforming S&P 500 During COVID-19, https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/major-esg-investment-funds-outperforming-s-p-500-during-covid-19-57965103
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