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The Growing Role of ESG

Recent market turmoil suggests that companies with a strong focus on environmental, social and governance (ESG) factors may be more resilient during times of crisis. In this Q&A, Savita Subramanian explains why.

A photo illustration of a beautiful empty field of yellow flowers at sunset, with mountains in the background. At the forefront of the field are enormous block letters: ESG. Each letter is also its own photo illustration, depicting aspects of environmental and socially responsible investing: the “E” shows an image of solar-powered energy, the “S” shows spaced-out people in an urban setting and the “G” shows the skyline of a large city with an orange sky and clouds overhead.

In the midst of historic market volatility related to the coronavirus, companies with strong ESG commitments offer a bright spot in an otherwise murky economic landscape, according to Savita Subramanian, head of ESG Research and U.S. Equity and Quantitative Strategy for BofA Global Research. As the pandemic intensifies global challenges such as food insecurity, access to healthcare and racial and economic equality, a strong focus on ESG could bring benefits to society, businesses and investors alike, Subramanian says. “Evidence suggests that companies’ health and society’s health may be closely intertwined and will likely be even more intertwined in the future.”

Here, Subramanian talks about the financial signals that appear to tie sustainability, social impacts and responsible governance to companies’ financial well-being.

Market volatility is nothing new, but what we’ve been experiencing this year feels different. What’s going on?

From February to March we experienced the fastest market downturn in history.1 But what’s really unusual is the nature of the crisis, driven by a deadly virus and the need for social distancing around the world. This is the first time in several generations that we’ve seen a global economic downturn driven entirely by a social challenge. When you look at it in the context of ESG, this has brought the “S”—for social—into sharper focus than ever before.

The corporate response has been fast and furious. From multinationals to small companies, everybody around the world stepped up their efforts to fight the impact of the virus. Textile companies shifted their operations toward making masks, financial companies exercised loan forbearance for consumers and businesses that were hardest hit, and many companies froze layoffs.

In addition to the social benefits these and other actions bring, it appears that looking out for the good of society can be good for companies, too. For example, based on aggregated client flows data, $8.2 billion was pulled out of equity exchange traded funds when the S&P 500 index went from a record high in late February to bear-market territory just four weeks later.1 During that same period, the ESG funds tracked by BofA Global Research2 continued to attract inflows, suggesting that sustainable fund managers were less pressured to sell stocks with strong ESG characteristics.

ESG funds attracted inflows during COVID-19 market selloff

Weekly and rolling 12-wk flows into ESG ($mn, 1/2014 -3/18/2020)

Chart of ESG funds inflows during COVID-19 market selloff

Source: BofA Global Research US Equity & Quant Strategy, SimFund

ESG is not concessionary if it’s practiced correctly. We believe it can help manage risk and potentially enhance returns.

Savita Subramanian, Head of U.S. Equity and Quantitative Strategy, BofA Global Research

How is corporate America standardizing ESG policies?

As the benefits of ESG become clearer, corporate leaders are strongly encouraging their peers to adopt best practices in areas such as disclosing comprehensive ESG information and helping investors understand how to interpret it. Across the board, companies are realizing that having a Diversity & Inclusion program, and a fair representation of women on the board of directors, are going to be critical in attracting the best talent. And they understand that failing to adopt best practices may cost them—and their investors—a lot of money. 

How does what you’re seeing during the pandemic align with longer-term ESG trends?

It’s hard to compare what we are seeing now with longer-term trends because of all the social and economic crosscurrents. In the midst of the healthcare crisis, we’re also experiencing an environmental crisis, and issues related to racial inequality and income disparity. The healthcare crisis has highlighted these issues—pointing a spotlight on endemic social issues that need to be addressed. It’s not only having impact in local communities, it’s informing local and national politics, the economy and the markets. So this is a unique moment in time, to be sure. That said, this crisis has only underscored the importance of ESG in guiding how businesses operate.

What lessons do you take away from all this?

For many, sustainable investing continues to come across as a feel-good, concessionary investment strategy, where you give up returns to improve the world. But in fact, that’s the opposite of what’s going on. Sustainable investing is not concessionary if it’s practiced correctly. We believe it can help manage risk and potentially enhance returns. If you look at this more holistically, ESG practices can create a culture of responsibility, sustainability and innovation; all of which can help enhance a company’s long-term outlook.

To learn more about sustainable investing, speak with your advisor.

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