Essex: We think that over the past year we have seen a broadening of interest in ESG and sustainability funds (and away from broader equity funds). We think that it is due to a number of factors, with the most important being performance and the continuing establishment of strong track records. Growing awareness of issues such as income inequality, global health, and climate change, particularly among younger generations that are reaching the earning and saving stage of their lives, has driven increased interest in the sustainability, ESG and clean energy funds.
Silk: The current crisis has proven that ESG driven investments are becoming the norm. The strong inflows are partially related to the increased awareness of investors to the subject but also to the fundamental bias of ESG funds to more sustainable business models. These companies have weathered the current crisis better than others. The growth in ESG and the strong performance so far in 2020 is a good start but more needs to happen to have a real impact.
Zeo: Every strategy is different, and I would caution anyone to read too much into recent relative performance in such a short timeframe. ESG factors are longer-term risk management metrics, not short-term performance metrics. We invest in businesses who prioritize sustainability because we see them managing risks before those risks turn into liabilities down the road
Hortz: Does this newer broader corporate mindset help “future-proof” our investments as some claim?
Pekin Hardy Strauss: It’s hard to know what the long-term effects will ultimately be, but I think we will see more management teams that view themselves as stewards of their businesses, rather than seeing the business as a way to extract wealth. I just don’t see investors continuing to put up with short-term thinking and financial engineering at the expense of the long-term health of a company. This should lead to greater long-term value creation and lower risk in investments.
Cornerstone: “Future-proof” is a strong statement and also has a connotation of risk only. It’s critical that we understand that both opportunity and risk are reflected in corporate sustainability. We can define corporate sustainability as “the relentless pursuit of material progress towards a more regenerative and inclusive global economy.” That mindset, albeit very long term and macro, would make for better positioning in the “next economy.”
Essex: If we have learned anything over the past couple of decades, it is that there is no such thing as a “future-proof” investment. However, we think the increased corporate awareness and the improved corporate mindset when it comes to environmental and social issues is a new minimum that is required of successful corporations. We can no longer afford to focus only on short-term financial metrics as a measure of success. The social and environmental issues that we face are very long tailed and will require continual focus and improvement. Companies that aren’t able to recognize these issues or provide solutions to these issues will not succeed in the long run.
Zeo: That is our thesis. Every company has risk factors that impact its underlying fundamentals. Traditionally, those risk factors have not included ESG factors, but we very much believe that a business who does not behave in a long-term sustainable way is introducing risks which may impair the company in the future. But I would hesitate to call it “future proofing.” The work of ESG investors is no less constant than that of the value investor, continuously reaffirming the investment thesis and evaluating a management team’s performance. For ESG investing, we see explicit mandates from firm management and Boards and we must stay hyperaware because companies can shift priorities and strategies quickly.
Hortz: What do you see as the longer-term implications of this current crisis on ESG investing and financial services?
Pekin Hardy Strauss: From an investment standpoint, I think the most important long-term change will be a stronger focus on good business stewardship and the sustainability of business models. The pandemic exposed a lot of weaknesses, but it also highlighted a number of opportunities for businesses to become more resilient (better balance sheet management, more elastic supply chains, etc.) and purpose driven. I believe investors are going to become more attuned to these qualities as they search out new investment opportunities going forward.
On a strictly concrete sense, I think the financial services industry is also going to become a better place to work as a result of the pandemic. While historically the industry has largely resisted the remote working model, the pandemic forced the industry to crash-test it, and it worked. Firms are realizing that they can utilize this model with no adverse effects to their businesses, which should lead to downsizing of real estate footprints and giving employees more flexibility with work/life balance.
Cornerstone: The current crisis has been the ultimate test of resiliency as tremendous inequities that have existed are being laid bare. The ability of corporate managements to handle employee, client and shareholder actions and communications reflects their priorities and competencies — and the ethic of companies will come through.