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COVID-19 highlights the importance of ESG-focused investing

Climate disclosures and environmental sustainability issues have topped investor agendas lately. Indeed, investor demand for companies to measure, disclose, and explain their ESG credentials has become somewhat a norm. This development has come as a surprise to many business leaders around the world.

It’s been ascertained that good governance is a key element of corporate resilience. Researchers at HSBC have evidence of why ESG should matter to all companies that are interested in providing shareholder returns and, critically, proof of the defensive qualities a strong ESG regime can provide.

2020 has brought with it the greatest value destruction of equities since the 2008 financial crisis, unprecedented volatility in all asset classes, and huge government and central bank intervention in the capital markets.

Climate-focused stocks outperformed others by 7.6 percent from December and three percent from February. High ESG-scoring shares beat others by approximately seven percent for both periods.

Companies that are better able to withstand shocks, make the right decisions and implement their strategies amid chaos, seemingly show these qualities:
1. They have a tried and tested command and decision-making structure.
2. Risk management is at the center of that structure.
3. Adequate independent scrutiny and testing is the norm – from the board down.

The company’s place in society is fundamentally linked to its reputation and stakeholders: customers, employees, communities, policymakers, regulators, and investors, among many others. Firms that neglect their role in society are likely to find little sympathy in times of crisis – when they need it most.

Companies that are already taking material steps to reduce their carbon footprint are likely to be able to adapt best to a new world that insists on lower emissions and waste.

HSBC’s analysts have said that their core ESG conviction is that “issuers succeed long-term – and hence deliver shareholder returns – when they create value for all stakeholders: employees, customers, suppliers, the environment and wider society. When crises like COVID-19 manifest, especially with social and environmental causes and implications, investors can see ESG as a defensive feature.”

Once the coronavirus storm passes, companies will undoubtedly need to take a long, hard look at their ESG strategies.

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