Sustainable Investing After Covid-19

by marsha vande berg
Oivind Hovland/Ikon Images

Marsha Vande Berg, former CEO of the Pacific Pension and Investment Institute, is a director of Mumbai-based Quantum Advisors.

Published June 2, 2020


“I’ll keep the path open — the path in my mind,” sings Bob Dylan in his new ballad, “I Contain Multitudes.” The title refers to a line in Walt Whitman’s poem “Song of Myself” and invites our reflection on how we can sustain and invite progress once Covid-19 loses its sting.

At the turn of the new year, world leaders — the responsible ones, anyway — were well on their way to being persuaded they needed to shift gears from focusing on next quarter’s profits to long-term mega-challenges ranging from climate change to global migration to rapid population aging. Enter the proverbial black swan, stage left, in the form of a virus. In a matter of weeks, the pandemic killed hundreds of thousands and all but shuttered the global economy.

Covid-19 justifiably diverted our attention from virtually all else. As Goldman Sachs CEO David Solomon underscored in early April, every company executive is busy ripping up his or her business plan. Corporate strategies that as recently as last winter were finally beginning to address environmental, social and governance issues have again relegated ESG to the back seat.

Covid-19 is a none-too-gentle reminder that corporations must be flexible to weather both the unknown unknowns (like pandemics) and the known unknowns (like climate change) ahead.

Solomon’s position was understandable, given the existential impact of Covid-19 on business. (And, in any case, he deserves credit for having been ahead of the pack on at least one important ESG topic: gender diversity. Solomon has said Goldman Sachs will not underwrite public offerings of companies if their boards are not diversified.) But Covid-19 should not be an excuse to bury ESG. Rather, it is a good reason to add pandemics to the list of ESG issues that will help determine long-term corporate success. By no coincidence, many of today’s large, sophisticated institutional investors including the world’s biggest index manager, BlackRock, with $7 trillion-plus in assets and Norways’s Government Pension Fund ($1 trillion-plus) already integrate sustainability strategies across their portfolios.

Covid-19 is a none-too-gentle reminder that corporations must be flexible to weather both the unknown unknowns (like pandemics) and the known unknowns (like climate change) ahead. And climate change, in particular, is not going to go on vacation while we sort out our response to the virus — with, for all we know, another one waiting in the wings. Indeed, there’s evidence that ignoring one sustainability criterion at the expense of other value considerations is a self-defeating way to attempt to maximize long-term returns.

“Long-term investors have to look ahead to the risks that might impact the value of their investments over very long time horizons,” argued State Street Chairman and CEO Ronald O’Hanley in a discussion with Wall Street Journal editors. “Their focus on sustainability, therefore, is a value-driven imperative, not a values-driven agenda.” (Boston-based State Street manages close to $3 trillion in assets.)

The Journal published O’Hanley’s interview the same day that the World Health Organization declared a public health emergency with international proportions. Over the following six weeks, equity markets would lose nearly 40 percent of their value. Sustainable funds and ESG funds also suffered large losses, but they fared better than conventional funds. According to Morningstar, seven out of 10 sustainable funds finished in the top half of their Morningstar Categories, and 24 out of 26 ESG-tilted index funds outperformed their closest conventional counterparts.

Granted, a factor that made ESG funds shine by comparison to the indexes was the collapse of oil prices. The dive of fossil fuels had only an indirect impact on ESG funds, which generally eschew oil, gas and coal stocks. But that’s more than a serendipity: one reason ESG funds avoid traditional energy stocks is that the industry adds the risk of greater regulation and price volatility to the companies’ futures. And the sort of thinking that integrates narrow self-interest with social responsibility makes corporations better prepared to manage risk as well as better citizens of the globe.

main topic: Social Impact
related topics: Business