As the UK and much of the wider world edges past peak infection, we are constantly reminded that we are not out of the woods yet. As we noted last week, the same can be said for markets, despite the US recording its largest monthly gain since 1987 in April. The slump and subsequent rally do however reveal some interesting short-term trends.
There are winners and losers of course. Areas of technology are often mentioned alongside supermarkets as the beneficiaries of the current conditions whereas tourism and airlines have seen their businesses decimated by fear and lockdown. Bricks and mortar Property companies face huge challenges. So far, so simple (which investment never is!).
Less widely reported is what has happened to sustainable investments. Quite simply, ‘ESG’ has outperformed the wider market, both on the way down and on the way back up.
This is not too surprising regarding the ‘E’ in the acronym – Environment. The oil price has collapsed and dragged the energy sector down with it. ‘Dirty’ sources of energy are largely shunned by ESG investment. We are all benefitting from cleaner air as business as normal has ground to a halt.
The ‘S’ and the ‘G’ – Social and Governance’ are also in the spotlight as never before. People and companies alike are acutely aware of their social impact as the man-made global recession bites and public health is the number one priority.
The governance of companies is headline news. Chief executives are applauded for taking pay cuts (often from extreme levels) and those that don’t will feel the heat of public opinion, particularly if their company is receiving state aid. The mantra ‘we are all in this together’ will be seized upon by shareholders and the public at large.
In truth, the reaction to the pandemic has speeded up a theme that was already getting firmly established and it does have consequences for investment. After all, investment should be for the long term. Companies that fail the ESG test are unlikely to be successful in the long term and their share prices punished accordingly.
We will all have to get used to more government involvement in our lives. The sheer scale of the intervention will have longer term ramifications with politicians emboldened not to give up all the authority to control that is now being seen. Subtle changes maybe, but no doubt increased pressure on companies to behave well.
So ESG should be imbedded in investment analysis and we constantly look for evidence of this when researching a Fund manager’s processes. And crucially, increasing evidence that the performance is rewarding the desire to invest sustainably for the long term.
Please continue to stay safe
The Investment Team