On this, the 50th Earth Day (COVID-19 edition) the conviction in investing responsibly that I hold has never been stronger. As we come to terms with how much our daily lives have changed in the course of the past two months, we also see the direct effect we have on our planet. From the return of marine life to the canals of Venice, the ability to see the mighty Himalaya through smog-free skies, and the return of wildlife to areas lost to urban sprawl, the impact we have is undeniable. While it has taken a near global economic shutdown to see these effects, and the human toll has been nothing short of devastating, this event has also been a validation for responsible investing and the opportunities it represents for investors with an eye on the future.
If not now, then when?
One of the most frequent counter argument I hear in regards to responsible investment is whether one needs to ‘give up’ investment returns in order to invest alongside one’s values and intentions.
Because most of the growth in responsible investment has taken place since the global financial crisis of 2008-2009, and much of it in the past 3-5 years, the majority of responsible investment portfolios have not gone through a bear market. Most investors have therefore adopted a ‘wait and see’ approach, unwilling to challenge the status quo and acquiescing to inertia by holding onto a ‘conventional’ portfolio.
I am pleased to report that the preliminary data gathered on market performance throughout this crisis is encouraging for responsible investment. By and large, the hit that responsible investments have taken during this recent downturn is less severe according to Morningstar, one of leading investment research firms with a sustainability rating capability. In fact, 24 of 26 responsible investment strategies (funds) outperformed their closest conventional counterparts*. This relative outperformance can be attributed to the generally higher quality of the holdings (companies that have corporate social responsibility charters, environmental sustainability practices, and governance controls in place) as well as the underweight in fossil fuels, which continue to experience a severe downturn based on both a supply glut and a demand collapse.
The prudent approach therefore, is to remove the risk that fossil fuels continue to represent to conventional portfolios. Studies by Morningstar and Boston-based investment firm GMO have demonstrated that divestiture of energy from historical performance through 2017 (beginning in 1925) resulted in a negligible difference in relative performance. However, given what we know about climate change and the advent of renewable energy and electric vehicles, the rationale for divesting isn’t just about value-alignment, but the forward-looking view that these industries are in long-term decline and their reserves will become stranded assets...with their respective stock prices reflecting as much.
Invest for the future
The current market environment is not all doom and gloom. Optimism in this dire situation is essential if we are to capitalize on the crisis by introducing long-lasting changes to our daily lives, be they how we travel, whether we continue to telecommute, or how secure we feel about our food and drug supply.
Allocating to companies building the green economy is also part of that optimism we need to have these days. Companies focused on renewable energy, energy efficiency and all food and forestry related sustainable technologies are part of this approach. Water infrastructure, pollution control, waste management should also figure into how the portfolio of tomorrow should be positioned. Whether through green bonds, or stocks in companies, ensuring you are properly allocated given your level of risk is the foundation of my investment process. For long-term investors with access to capital, putting money to work in these sectors is not only empowering but represents an opportunity to get invested at attractive valuations relative to what we had to work with at the beginning of the year.
Where to now?
While the recent relative outperformance is encouraging, and highlights the benefits of investing responsibly, it’s also an opportunity to help companies move towards a long-term stakeholder-centric approach to corporate behaviour. It is during these times of strife and uncertainty that corporate leadership emerges. Companies moving in a positive direction by engaging their employees and being good corporate citizens will be remembered.
There is no better time to examine the sustainability of your investments, better understand the environmental, social, or governance-related risks they face, and work together to develop a plan to better align your investments with your values if you so desire.
*Source: https://www.morningstar.com/articles/976361/sustainable-funds-weather-the-first-quarter-better-than-conventional-funds