ESG value in the age of coronavirus and beyond

ESG Ireland - Be Part of the Solution

Kim Nguyen-Taylor, a sustainable investing consultant, shares her thoughts on the value of ESG investing in the age of coronavirus and beyond.

In this age of coronavirus and given the many societal threats that we are facing in our world today, we as individual investors should nonetheless feel empowered that we can be catalysts for change by factoring environmental, social and governance (ESG) issues into our everyday investment practices.

As coronavirus lockdown restrictions are being lifted in varying degrees across the world, we as global citizens are learning to acclimate to a new low-contact way of life that, as many epidemiologists agree, will be necessary in paving a high-impact path forward to combat the disease, salvage our societies, and restore our economies. By the same token, we as global investors should adapt to a higher impact, integrated approach for evaluating assets to address the many sustainability challenges that we care about. ESG investing allows us further to construct resilient, long-term value portfolios which are better poised to withstand the type of systemic shocks and volatility we have experienced with the pandemic and that we should expect from future exogenous events.

The coronavirus has underscored the universal significance of ESG issues. As the dust settles, we should embrace our duty as responsible investors and harness our power to influence change. We should take this opportunity to revalue portfolios for previously ignored social risks, lobby for better social disclosure, leverage more sophisticated ESG analytics, and engage more effectively with company management on social issues.

Recognizing ESG value

Although I have done empirical studies to statistically substantiate the materiality of sustainability factors on fixed income and equity valuations, I also bore witness to how governance failures led to the dissolution of two of my former employers, Arthur Andersen and Bear Stearns, and need not be further convinced about the value proposition of ESG investing. However, for remaining skeptics, the coronavirus has chronicled real life case studies of how poor corporate culture and behavior can adversely affect all stakeholders. We are observing these negative financial repercussions in a handful of gig economy companies.

We also now recognize that social matters significantly impact all generations as well as all industries and geographic markets, given that no demographic or economic sector has been spared in this pandemic. Our previous narrow perceptions, that social issues are championed predominantly by millennials, and that they are mostly material to labor intensive businesses with heavier exposure to emerging markets, have shifted with the turn of events we have witnessed.

Revaluing and engaging

I would attribute the recent recovery in the financial markets to post-quarantine pent up demand. I suspect further that any sustained strength in the markets will reflect the optimism of a viable vaccine that will hopefully be developed and deployed, laying the foundation for the post-pandemic world. However, we must not become complacent about the cumulative societal and financial damage that will have been done. We should anticipate a fundamental correction in business valuations over the long term because the coronavirus is not a controversy that will just casually come and go, but a harmful threat that is exposing vulnerabilities in ESG standards across the corporate universe. Revaluing portfolios at this point would therefore be a prudent exercise. We should consider assigning fresh premiums or discounts on enterprise values based on a company’s ability to safely reopen its business given its workplace protocols, as well as on its adaptability to long-term environmental and societal challenges.

Lobbying for transparent and consistent corporate disclosure of social issues that have traditionally been more difficult to uncover, has become increasingly important. Such indicators include occupational health and safety practices, worker access to healthcare, workforce diversity, human rights violations, supply chain management, and community involvement. Conventional raw reporting on ESG issues has proven to be inadequate, so now is the time to explore and embrace new data collection methods such as artificial intelligence-driven ESG analytics, tracking and scoring. Finally, engaging more aggressively with company management on social issues, should become an important part of our agenda, the way endowment funds have not been shy in the past about fossil fuel divestiture dialogues.

Catalyzing change

The coronavirus has demonstrated that the host of humanitarian threats we face such as global warming and deforestation, though may seem remote to some of us now, are actually quite imminent. The pandemic further affirms that such threats are non-partisan in nature and require long-range thinking and international cooperation to combat, that these are not the problem of a future generation or just one population but the responsibility of all of us, and that addressing them goes beyond being charitable but advocating for a sustainable future for humanity.

One of the easiest ways to catalyze change is to invest responsibly, because it begins with each one of us, the individual investor. Regardless of prevailing political mandates, we can harness our own power to invest in, engage with or divest of a company. We must finally change attitudes about ESG integration as a niche, alternative approach to evaluating assets, but rather as a mandatory and mainstream way of enhancing investment returns and mitigating risk, with the benefit of reaping long-term societal dividends.

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Kim Nguyen-Taylor

Bio: Kim Nguyen-Taylor is a sustainable investing consultant and has been engaged in ESG-related empirical research, policy briefings, curriculum case studies, and developing an ESG investing strategy for sustainability-focused organizations. She has published research on various ESG topics, including ESG integration and equities performance, US regulation on responsible investment, and ESG considerations in long/short trading, for the UN-supported PRI and the CFA Institute. She previously worked at JP Morgan and Bear Stearns Asset Management in fixed income research and portfolio management, and at Calvert Investments in the same role, with a focus on sustainable investing. Kim received a Bachelor of Arts degree in Economics from Cornell University.

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