Interest in sustainable, responsible impact investing (SRI), investment strategies aimed at enacting both social change and financial gain, has increased over the years. In fact, according to Morningstar, sustainable funds outperformed their peers in 2019, continuing the recent trend for SRI.
Now, with heightened awareness surrounding the welfare of humanity, industry experts are beginning to weigh in on how the coronavirus will impact this growing discipline. Many believe awareness and support of businesses who practice Environmental, Social and Governance (ESG) criteria may begin to accelerate – and investors could have an opportunity to contribute.
"I think there’s going to be a lot of public interest in SRI and ESG," says Kay Kramer, Principal and Co-Founder at Birchwood Financial Partners. "Last year the United States saw record inflows into this type of investing and significant inflows have continued this year during the pandemic1."
Because of this boom and the impact of COVID-19 on social welfare, Kramer says investors may be more inspired to support businesses that have demonstrated tremendous care and safety for their employees, performed acts of charity and generosity and displayed compassion for global citizens during this pandemic. Kay believes even those businesses that received relief through the Paycheck Protection Program, but then returned funding after it was deemed unnecessary, have been seen favorably.
Are your SRI and ESG funds going to the right companies?
Yet as investors' awareness of and interest in SRI and ESG increases, it’s important that investors realize that not all companies "walk the talk.” Open display of a company’s good work in society is one of the oldest public relations tricks in the book – it’s likely that not all those who say they are practicing corporate social responsibility actually follow through.
"Some companies have been ‘greenwashing' for a long time," says Kramer. It’s the business practice of promoting corporate social responsibility, while not following through on what they promote. "There are a lot of new investment products out there that tout being socially responsible, many investors would not agree with their very loose definitions of ESG/SRI.”
In fact, a number of companies have been accused of greenwashing by whistleblower groups. Ultimately, the investor needs to do their homework to determine the ESG funds that best align with their goals. Kramer offers these tips for investors who are inspired by the current pandemic and new to socially responsible investing:
1. Know the history of the company
Vetting the company's history can give investors helpful insight as to the legitimacy of its ESG practices. Does the company or mutual fund have a track record in ESG, or is it an upstart? A long history of sustainable and ethical practices is an indicator of strong governance and true dedication in a company.
2. Understand the spectrum of the company
It’s not uncommon for some large businesses to appear to abide by ESG principles, yet also have related divisions or ownership in other businesses that conflict with these practices. These loopholes might not be immediately apparent, but with some digging, a savvy investor may uncover these discrepancies.
3. Have the companies documented their position on corporate social responsibility?
Many companies today have taken a stand on corporate social responsibility (CSR). Some have made it part of their core mission and others have only paid lip service to the concept. By reviewing their documentation, it should be easy to understand their governing principles.
4. Understand the risk
In researching the businesses or mutual funds, it can be helpful to understand how well the company has integrated risk mitigation into their business planning. While the current economic conditions have been devastating for many people worldwide, the risk of a global pandemic has been on the radar of the World Economic Forum since 20062. Investors may want to ensure the business has a history of preparing for unforeseen events that will impact their business in the future.
Only time will tell how the coronavirus pandemic will impact socially responsible investing and the companies that have supported ESG practices. If recent trends continue, SRI could extend its upward trajectory as new investors enter the market. For now, Kramer points out a small silver lining amid the confusion: the environmental impact of decreased commercial activity worldwide, leading to less air pollution and less use of fossil fuels.
“There are clear skies out there in cities that haven’t seen blue skies in years," Kramer says. "Will there be less flying [after this pandemic]? Will there be less driving? Nobody knows.”
Souce 1: Iacurci, Greg. “Money moving into environmental funds shatters previous record.” CNBC: January 14, 2020; https://www.cnbc.com/2020/01/14/esg-funds-see-record-inflows-in-2019.html; accessed May 21, 2020.
Source 2: World Economic Forum in collaboration with MMC (Marsh & McLennan Companies, Inc.) Merrill Lynch and Swiss Re and in association with the Risk Managementand Decision Processes Center at the Wharton School of the University of Pennsylvania. “Global Risks 2006.” World Economic Forum: 2006; http://www3.weforum.org/docs/WEF_Global_Risks_Report_2006.pdf; accessed May 21, 2020