ESG: detractor or differentiator during testing times?
We believe the recent market turbulence provides investors with a potential opportunity to observe how environmental, social, and governance (ESG) considerations play out in their portfolios and how expected positive outcomes could materialise.
By Shaunak Mazumder and Caroline Ramscar
The world is undergoing a crisis unlike any in living memory, as the COVID-19 pandemic spreads human suffering and disrupts economies. In late March, UN Secretary-General António Guterres said that in order to recover from the outbreak, we must build “inclusive and sustainable economies that are more resilient in facing pandemics, climate change” and many other global challenges.
As an investment manager, we incorporate these long-term perspectives into our portfolios to ensure that we are investing in companies that are not just looking to make short-term gains but which aim to benefit the wider society in which we operate.
Preserving and growing capital
In recent months, our active equity strategy with explicit ESG objectives has demonstrated just how the long-term goal of building a sustainable world can also potentially benefit investors over the short term.
While past performance is certainly no guide to the future, in our view the strategy has shielded investors from the worst of the market declines through its focus on companies with the following attributes:
- High or improving ESG characteristics: Quality companies of this type have proven to be more durable through the drawdown; examples include Novo Nordisk, Nestle, Nintendo and Microsoft*
- Sustainable growth: Companies with recurring and growing revenues, and high margins, have proved resilient and some have even benefitted from the current shutdown; examples include AIA, Intercontinental, MSCI and TeamViewer*
- Low carbon exposure: Avoiding the energy sector has proven particularly beneficial given the recent collapse in oil prices
Looking ahead, we believe access to capital and liquidity will be imperative for companies to make it through the crisis, as the measures enacted around the world to curb the spread of COVID-19 may be in place for some time.
We expect the emphasis on access to capital and liquidity to favour companies with the most visible growth prospects, sufficient access to liquidity, resilient business models, and – crucially – those that can help build the inclusive and sustainable economies described by the UN Secretary-General.
Well managed companies that provide essential goods and services or possess a unique asset, with solid balance sheets and cashflow characteristics, should in our view prove more resilient in an economic downturn.
During these testing times, it is critical for companies to remain focused on long-term ESG objectives, as opposed to short-term decision making and near-term wins. The resilience of business models and practices should remain in the market’s memory.
Some stocks that display both sets of attributes include certain technology enablers, data providers, insurance brokers, life-sciences tools providers, and pharmaceutical drug manufacturers. We believe such companies can maintain their long-term earnings growth trajectories well beyond this crisis.
This is an extraordinary moment for investors: one of the worst selloffs in history, in terms of both speed and magnitude, has brought about some potentially remarkable market opportunities; it also offers a chance to engage with companies in order to deliver real, positive change.
We will continue to seize opportunities to invest in companies that appear, in our view, mispriced relative to their underlying value – and to work with those we own to bring about a world that is more resilient to future crises. It is important that we remain prepared for what lies ahead and look to the impact of our actions not only on returns, but on the environment and society in which we live.
*For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.
Past performance is not a guide to the future. The value of an investment and any income taken from it is not guaranteed and can go down as well as up; you may not get back the amount you originally invested.