Investor demand for environmental, social, and governance (ESG) integration has increased rapidly across regions and asset classes in recent years and is now poised to accelerate in the wake of COVID-19.

To help frame the ESG outlook from here, it is important to consider which factors contributed to greater investor adoption of sustainability objectives before the pandemic. We believe a key fundamental driver of ESG adoption has been a growing recognition among asset owners that ESG factors can be material to corporate financial performance and thus investment performance.

Recent fund flow activity demonstrates this point. According to Morningstar, the global sustainable funds universe experienced net inflows of nearly $46 billion during the first quarter of 2020, compared with net outflows of $385 billion for the overall funds universe.1 As illustrated below, Europe accounted for the majority of flows (approximately 73%), but less than prior quarters. Global inflows were down nearly 30% from the fourth quarter of 2019, but were still 90% higher year-over-year.

We believe ESG issues have become more financially material due to the influence of structural themes, including shifting demographics and societal attitudes, natural resource scarcity, and risks associated with climate change. Interestingly, a growing list of U.S. business leaders are advocating for a greater focus on customers, employees, suppliers, and communities—challenging the conventional belief that companies exist solely to generate profits for shareholders.2 COVID-19 has clearly solidified this stakeholder mentality.

The pandemic has already significantly increased scrutiny of companies’ social and governance practices, including the treatment of employees and suppliers during the crisis, community engagement efforts (including healthcare system support), and executive pay and capital allocation decisions—particularly for those companies that have received government funds.

There is heightened sensitivity among executives to the virus being a litmus test of their true commitment to ESG principles.

There is heightened sensitivity among executives to the virus being a litmus test of their true commitment to ESG principles. The media spotlight has been intense, with heightened scrutiny of how companies are treating their employees, customers, and suppliers. No one wants to be seen as lacking compassion in this environment. This scrutiny will likely moderate as virus fears begin to subside, but the underlying structural forces that are driving executives’ growing stakeholder orientation are more enduring.

From an environmental perspective, near-term momentum in green policy initiatives may temporarily stall in the immediate aftermath of COVID-19 as governments prioritize stimulus “at any cost.” Europe remains the notable exception, having recently unveiled a €750 billion recovery package—25% of which is earmarked for climate-friendly initiatives, including green building and clean technology investment.

Companies and asset owners are unlikely to abandon their increasingly public commitments to reduce the carbon intensity of their businesses and portfolios. The private sector could thus become even more important to achieving the Paris Agreement goal of limiting global warming to significantly less than 2 degrees Celsius by the end of the century.

We believe investor demand for greater ESG integration in traditional equity and fixed-income portfolios will continue to accelerate beyond Europe.

Against this backdrop, we believe investor demand for greater ESG integration in traditional equity and fixed-income portfolios will continue to accelerate beyond Europe.

Although relatively modest, institutional demand for dedicated ESG strategies may increase as more asset owners seek to orient investments toward positive environmental and social objectives—particularly given heightened sensitivities to the role of a strong global healthcare system in combating future pandemics.

1 Morningstar Manager Research, Global Sustainable Fund Flows, May 2020

2 Business Roundtable Redefines the Purpose of a Corporation to Promote an Economy that Serves All Americans, August 2019

Blake Pontius, CFA, is the director of sustainable investing and a portfolio specialist on William Blair’s Global Equity team.

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus and summary prospectus, which you may obtain by calling +1 800 742 7272. Read the prospectus and summary prospectus carefully before investing. Investing includes the risk of loss.

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This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

The William Blair Funds are available to U.S. residents only. Non-U.S. residents, please click here.

Copyright © 2020 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus and summary prospectus, which you may obtain by calling +1 800 742 7272. Read the prospectus and summary prospectus carefully before investing. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

The William Blair Funds are available to U.S. residents only. Non-U.S. residents, please click here.

Copyright © 2020 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

Statement of Financial Condition | NMS Rule 605 & 606 | Business Continuity Plan | UK Stewardship Code
Cookie Policy | Social Media Disclaimer | Privacy & Security | FINRA’s BrokerCheck

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