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With the private sector playing a key role in efforts to halt the virus and accommodate evolving consumer trends, investors will increasingly turn their focus to companies helping solve the world’s most pressing problems with strong environmental, social and governance (ESG) credentials, according to leading global investment manager AllianceBernstein.
Daniel Roarty, chief investment officer, sustainable thematic equities at AllianceBernstein, says: “Companies with the strongest ESG practices are, by definition, higher-quality companies. They are more profitable, have less volatile earnings and are better at mitigating serious business risk that can lead to large financial losses and bankruptcies. As a result, they tend to provide enhanced reduction of downside risk in times of market stress.”
These attributes were in high demand in the sell-off earlier this year. During the first quarter, companies with the highest ESG ratings in the MSCI ACWI Index fell by 15.6 per cent, around 650 basis points less than those with the lowest ESG ratings. The spread was even greater for US equities, where ESG leaders dipped by 10.8 per cent in a market that tumbled by 19.6 per cent.
As a result, funds that focus on ESG performed well during the period. According to data from Morningstar, 70 per cent of sustainable equity funds ranked in the top half of their respective categories.
Stakeholder capitalism
The pandemic has also shone a light on ESG leadership. As the social and economic impact of the pandemic escalates, investors will witness the first major test of stakeholder capitalism.
In 2019, 181 American chief executives, including at Amazon and Xerox, co-signed a declaration stating that their businesses would include consideration for all stakeholders, not just shareholders. However, actions that may have been dismissed as public-relations spin at the time are now being viewed through a very different lens, says Roarty.
Home Depot, for example, extended extra paid leave to employees over 65, who are most at risk of getting sick from a coronavirus infection. PayPal established an emergency relief fund for employees with short-term cash needs.
While these actions may not directly feed through to short-term earnings, investors are increasingly recognising the benefits a stakeholder approach can have, not only on lower regulatory risk, but customer loyalty and employee engagement.
Long-term growth themes
The pandemic has served as a wake-up call for global sustainability, with the world’s biggest environmental and social challenges unable to be solved by public policy alone.
Roarty explains: “To drive meaningful change, governments require the innovative and financial capacity of the private sector, and companies with the best solutions will be the ones to tap into substantial long-term
growth opportunities.”
He points to the United Nations Sustainable Development Goals as a good starting point. Accomplishing the UN’s ambitious agenda will require more than $90 trillion in capital over a 15-year period, with the bulk of that being supplied by the private sector.
According to Roarty, digital communication technologies are gathering huge momentum, while financial technology and payments companies that enable growth for small and medium sized businesses (SMBs) will likely fare well, with the current crisis highlighting the vital importance of SMBs. Recent events have also pushed health-related investment themes to the fore.
“While the ultimate solution to this crisis will be a vaccine, other solutions will have an important role to play too,” he says. “Telemedicine, drug discovery and diagnostic testing stimulate innovation, lower the cost of healthcare service delivery and extend its reach.”
Looking ahead, the outlook for sustainable companies is bright. Roarty concludes: “The longer-term prospects for sustainable stocks are very promising. The crisis is adding new catalysts for companies that can provide innovative solutions to our largest environmental and social challenges as the world emerges from the COVID shock.”
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The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein (AB) portfolio management teams and are subject to revision over time. References to specific securities are provided solely in the context of the analysis presented and are not to be considered recommendations by AB. It should not be assumed that investments in any specific security was or will be profitable. MSCI makes no express or implied warranties or representations, and shall have no liability whatsoever with respect to any MSCI data contained herein.
