On a practical level, the global spread of Covid-19 has had an impact on almost everything. From our freedoms to socialise and travel to something as simple as stocking the fridge, there is hardly an area of daily life that is yet to be affected by restrictive measures.
While the pandemic has slowed daily life down dramatically, it has accelerated a number of social and economic trends that have been in development for years. The world of work is perhaps the clearest example. With employees that are able to work from home being told to do so, businesses are reassessing their working practices – why pay for a large inner-city office when the job can be done just as effectively from home?
In the world of investing, Covid-19 has led to similar reevaluations across the board. Any seismic shift in public behaviour is always going to hit markets hard, but the global pandemic has forced investors to reconsider where they put their money and the qualities they look for in prospective opportunities.
The headline changes have been increased focuses on sustainability, on corporate governance and, as ever, on digitalisation. The economic and social aftershocks of Covid-19 will take time to materialise – we are, after all still in the midst of the pandemic – but it is unthinkable that a situation so dramatic and so global will not make a lasting impact on the core building blocks of our lives. Investing, as far as it pertains to global economic activity, is one of these key areas.
The case for ESG investing
For many investors, environmental, social and governance (ESG) issues have played a part in the decision-making process for some time. A recent survey from Macquarie Infrastructure and Real Assets (MIRA) found that 58% of investors report their focus on ESG increasing over the last five years, while 91% expect it to increase further over the coming five. What this tells us is that ESG is a topic in the ascendancy.
Covid-19 has served to highlight both structural problems and structural fragilities. The impact of the virus on supply chains has been nothing short of calamitous, with borders locked down to differing extents and production issues abound as a result of the pandemic. A greater focus on how businesses have been treating their workers across a difficult year, along with a growing desire for more logistically sustainable supply chains, have shifted the goalposts for what corporate success looks like.
Following the global financial crisis of 2008, conversations with investors were firmly rooted in raw figures. People focused on profitability, cost-cutting and efficiency. These are still relevant within the context of the latest financial crisis, but there are other considerations running alongside them. The treatment of employees and suppliers is a part of the conversation, while companies are expected to not only rebuild, but rebuild in the right way.
The chart above highlights how far consumer expectations of businesses have come. Work to resolve issues of diversity and gender equality is now expected by the majority, while the more nebulous quality of ‘social responsibility’ is front of mind. The impact of business on communities and on society has largely been overshadowed by environmental issues up until fairly recently, with the pandemic pulling this impact into sharper focus.
Socially responsible investing or ESG investing gives an individual the opportunity to align their personal goals and finances with the wider goals of society and the values they hold on a personal level. This is why interest in ESG investing has been growing alongside increasing awareness of global social and economic issues. What the global pandemic has served to highlight is the more immediate importance of these concerns.
Sustainability still in the spotlight
Covid-19 has fundamentally changed how we define sustainability within a business context. For years, health and safety has been a concern for businesses, but it has been viewed as somehow external to the core operation and certainly not central to the sustainability conversation. Covid-19 has altered the perception of employee and customer health.
Health is multifaceted, meaning it is more than simply the absence of disease or injury. Helping to ensure a good state of physical, mental and social wellbeing for employees has become more a matter of corporate responsibility in a time where many are working from home. Businesses are needing to find new ways to support and protect remote employees, a concern that is likely to continue after the pandemic once the logistics of work have been reevaluated.
This focus on wellbeing is, fundamentally, a sustainability concern. The ability of a company to protect its employees and its supply chain has direct links to performance, while the ability to adapt quickly to changing circumstances is a clear operational advantage.
Of course, environmental concerns are still high on the agenda. The impact of Covid-19 and its aftereffects will be felt for years, while the overwhelming consensus is that it could prove to be a significant boost for ESG as a concept. Investors are increasingly concerned with not only making money, but also ensuring that their wealth is used for the better of society.
The pandemic has highlighted that sustainability-focused companies have proven to be defensive in a difficult market climate. There are issues like greenwashing – the process of marketing a business as more ‘green’ than it actually is – to contend with, but sustainability continuing to emerge as both a key public demand and a business boost is a fortunate convergence.
This change in focus is perhaps most neatly represented in the projections for clean energy stocks, particularly when set against that of fossil fuels. ESG indices are heavily in favour of the companies of the future and are far less interested in what you might call the dinosaurs. The kind of ‘green’ technology that is associated with ESG companies is leading to lower prices and increased productivity. It seems only a matter of time before ‘clean’ or ‘green’ becomes synonymous with strong performance.
Other wheels in motion
There are a few other trends that have been accelerated by Covid-19 that are worth mentioning. One is the increased interest in investing among younger people. During the most volatile periods of the pandemic, the often violent market movements have made headlines, both on the way down and the way up.
If you couple this heightened awareness of the markets with the historically low interest rates affecting cash accounts, what you get is an uptick in people investing for the first time. A study conducted by Finder.com in June found that three-quarters of millennials said they were planning to invest within the year. This is a trend that’s been growing for some time but kicked into overdrive during the pandemic.
The impact of Covid-19 has had other side-effects, too. One is the increasing use of e-commerce among the older generations. More at risk of serious health problems from the virus, older consumers are adopting e-commerce to avoid leaving their homes when shopping. Online grocery shopping has surged as a result and businesses that offer better online services will, now more than ever, be at an advantage.
Like remote working, shopping trends are likely to settle down once the world has moved past the pandemic, but there will be lasting generational changes that investors will need to keep in mind as they plan for the medium and long term. We may not be out of the woods yet with regards to the immediate health and economic crises we face, but there are signs everywhere of what a post-pandemic investment landscape might look like.