Emissions drop highlights the potential for ESG investing

Post-pandemic, we have a chance to make a sustainable return to ‘normal’, writes Tim Cockerill.

Satellite images reveal the extent to which pollution has fallen in cities around the world since lockdowns have been introduced. The difference is huge in places such as Delhi where a fog of pollution normally hangs over the city. Blue sky has now appeared. This situation is repeated all around the world.

In Bristol, England, where I live, pollution is estimated to have fallen by 40%, and the air is palpably cleaner. The cause of the drop is clear, less transport and less industrial activity equals less pollution. In the UK, the amount of traffic has apparently fallen to where it was in the mid-1950s. People living in aircraft flight paths are getting used to the quiet – passenger flights from Heathrow are down by 75%. Aircraft are big polluters. Per person, flying emits 90% more CO2 than travelling either by train or road, and because it is released at high altitudes its impact is worse.

Of course, this hiatus in emissions is temporary, as the global economy slowly picks up emissions will climb again. We know the impact of Covid-19 on the world economy is severe, so the need to return to 'normal' is an imperative, indeed the consequences of not doing so are for most people unthinkable. But what we are seeing in the scale of reduction in pollution is hopefully a glimpse of the future, pointing in the direction of the where the world has to go, and fast.

- Investing to tackle climate change: fund, trust and ETF tips

Supporting sustainability

Investing in organisations that aim to support this drive to a sustainable return to 'normal' is gaining traction. According to The Guardian, the UN secretary general António Guterres said recently that governments should not use taxpayer cash to rescue carbon-intensive industries and fossil fuel companies, but rather direct economic rescue packages for the Covid-19 crisis to businesses that create green jobs and cut greenhouse gas emissions. This decarbonisation drive plays well into the environmental theme running through ESG investing.

There have been numerous reports indicating that ESG funds have, so far, been more resilient to the economic shock created by the lockdown. MSCI in particular has indicated a marked out-performance, and it is not difficult to see why this might be. Oil and gas is a major sector that ESG funds tends to avoid and with the oil price having fallen so sharply, -50% year to-date, it is not been a good sector to be invested in. ESG funds can also be light on their exposure to consumer stocks and airlines, areas that have been hard hit in the market sell-off.

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In addition, some sectors in which ESG funds find a lot of stocks, such as technology and healthcare, have been more resilient. Socially guided investments often benefit from recurring revenues, potentially making their business models more durable. It is also reasonable to assume that the quality of corporate governance required by stocks held by ESG funds is high, making them more robust to difficult economic conditions.

However, it is too early to really draw firm conclusions. Only when the economy begins to recover will it be possible to say whether ESG has outperformed, but the early signs certainly look encouraging.

Driving change

Decarbonising the global economy and re-shaping it into one that is sustainable is going to take a lot of money, vision, and determination. It is estimated that to meet the 2015 Paris Accord target, to keep the rise in global temperature to +1.5%, it will require investment of $2.4 trillion every year until 2030.

That said, change is already taking place. Look at the energy mix in the UK and how this has altered over the past 20 years. Coal-fired power stations produce a tiny fraction of our electricity, while renewable energy increasingly provides our power.

Globally, 75% of new electricity-generating installations in 2019 were renewable. With the UK experiencing nice weather recently, some households on renewable tariffs are even being paid for the power they generate. It is this transformation that will provide investors with outstanding opportunities over the next 10 to 20 years, I believe.

History shows us that the make-up of equity indices change over time, as sectors develop and grow, while others fade. My expectation is that sectors related to decarbonisation, energy efficiency, resource management and waste management will dominate the future and hopefully provide outstanding returns.

The Covid-19 crisis provides an opportunity for governments to support businesses that are already working towards a sustainable future and to initiate and support areas where development and growth is needed. While in the short term most businesses may require support irrespective of their environmental soundness, a strong signal can be given about the future direction.

I am optimistic that the pandemic will drive the sustainability agenda forwards; the relentless pursuit of economic growth and wealth has been paused, giving time for reflection; society and people are more important. These sentiments may bring fundamental changes in what is valued most. And investing in full knowledge of the impact that you have on the environment and society has to be the way forwards, and when that investment is made with the intention of bringing about positive change, we all win.

Tim Cockerill is investment director at Rowan Dartington.