Monday 15 June 2020 10:31 am

A green light for sustainable investments

Maria Nazarova-Doyle is head of pension Investments at Scottish Widows

The aftershock of the Covid-19 pandemic will be felt by the economy and our financial markets for years to come, despite the encouraging signs of businesses beginning to open up. 

Friday’s figures revealed that the economy contracted by 20.4 per cent in April, while the Office for Budget Responsibility recently warned that the crisis could undermine Britain’s public finances until the next election, with GDP shrinking by four per cent during that period. 

This is all against the backdrop of the wider market volatility seen in the last few months. 

For those seeking to build and grow their savings, all eyes have long been on the ability of sustainable investments to weather ups and downs. Most notably, the focus has been on the looming threat posed by climate change, which has helped to drive increased interest in the sustainable sector. 

The appetite for options that consider more than just the balance sheet or income statement is growing — now the spotlight is not just on returns, but on how a company behaves from an environmental, social and governance (ESG) perspective. 

There has been a visible uptick over the past few years in investor and consumer awareness around the environment and climate change. Environmental campaigner Greta Thunberg has become a household name, while Extinction Rebellion protests have drawn attention to the issue in cities across the world.

Now, the new Covid-19 lens has shed light on social factors in particular — the “S” in ESG — that had previously been less of a focus. From supply chains to labour forces, people are becoming more wary about the impact of business on wider society.

There is not just an ethical issue, but a business one. Sustainable funds outperformed in the first quarter of this year, at the height of the Covid-19 outbreak. 

This is the tipping point and a moment for genuine change. This global crisis has had a profound impact on everyone’s lives and it will undoubtedly take time for markets to fully recover. 

There is a strong belief that ESG principles will become even more significant as the world decides how to build back better and reignite domestic economies. 

In our industry it is important to respond quickly to these shifts. We are seeing investors looking for funds that appeal to their lifestyle choices and beliefs, while still also offering a good return opportunity

This is why this month Scottish Widows joined forces with 200 business leaders in an open letter to UK and EU leaders, led by the Institutional Investors Group on Climate Change (IIGCC), calling for a sustainable economic recovery and an accelerated transition to a net zero emissions economy, in line with the Green Deal and the Paris Agreement.

The evidence keeps stacking up. A new study by Imperial College London and the International Energy Agency found that clean power was leagues ahead of fossil fuels in the first quarter of this year. And according to a recent report published by BlackRock, funds ranking in the top 10 per cent for sustainability scores were on average in the top 29th percentile for returns. 

While we should avoid drawing firm conclusions from just one quarter, these are encouraging results that could give ESG investing the final boost it needs to enter the mainstream.

Of course, despite promising recent performance, it should be noted that early data is by no means a definitive indicator. And efforts to combat climate change may yet take the backseat as the world juggles various priorities, not least recovering from coronavirus. We are now caught between the “before” and “after” Covid-19. Investing, like so many other areas of life and business, is characterised by ambiguity and uncertainty. 

But uncertainty is nothing new when it comes to ESG investments — they have always had to battle scepticism, confusion, and inconsistent definitions. And while there are still clear challenges to be faced, there is now an opportunity to reset and rethink how we approach the recovery.

For investors, governments, stakeholders and consumers, the grass on the other side of this pandemic should most definitely be greener.

Main image credit: Getty

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