The coronavirus pandemic and its economic fallout will trigger a ‘skyward surge’ in environmental, social and governance investing over the next 12 months according to Nigel Green, founder and chief executive of deVere Group.

The firm is an independent advisor to international, local mass affluent, and high net worth clients with $12bn under advisement.

Green said in a statement that the coronavirus pandemic will trigger a ‘skyward surge’ in sustainable, responsible and impactful investing over the next year.

“Since the Covid-19 public health emergency up-ended the world, the latest broad analysis shows that ESG funds have typically continued to outperform others,” he added .

Indices and products that integrate ESG ratings have performed relatively better than mainstream benchmarks during the recent volatility according to The Sustainability Report.

#ESG indices, products faring relatively better in coronavirus response https://t.co/firWG2WdtS

— Dave Guarino (@dave_guarino) March 27, 2020

“According to the February 2020 statistics for Rainmaker Information’s Vantage Point chart packs, the ASX200 lost 7.7% for the month, while the MSCI Australia ESG Leaders index lost only 5.8%,” said the report. “The February data does not capture March’s market fallout as the coronavirus pandemic truly bit, but according to MSCI, the trend line for indices constructed to capture companies with better ESG performance continued.”

Green added that ESG investing was already going to reshape the investment landscape in this new decade but the coronavirus will quicken the pace of this reshaping.

“Investors are increasingly aware that it is possible – and increasingly necessary – to make a profit while positively and proactively protecting people and the planet,” he said. “As such, they will be making investment decisions after measuring the sustainability and societal impact of a sector or company as these criteria help to better determine their future financial performance, or in other words their risk and return.”

Investor reaction

Fiona Reynolds, chef executive of the United Nations-supported Principles for Responsible Investment, said in a blog that the response of corporations and finance to the Covid-19 crisis will be judged against ESG criteria.

The PRI's CEO @Fireynolds on #coronavirus: "Looking ahead to the recovery from #COVID19 investors are offered a unique opportunity to re-evaluate our global financial system and to bring a wider, deeper drive towards sustainability issues". Read more: https://t.co/9DYrsRgJkt pic.twitter.com/sNE4rcpJAz

— The PRI (@PRI_News) March 27, 2020

Reynolds said: “The landscape has changed around us. Accountabilities will be redefined and some corporations and investors will be unmasked as the lack of substance behind their ESG rhetoric becomes clear.”

The PRI has published a briefing, 7 Key Actions for Investors, which recommends that their engagement with companies in the short-term is re-prioritised and discussions on topics not relevant to Covid-19 are postponed.

“Of course, even in Covid-19 related engagements, unless there is evidence of irresponsible behaviour, we must allow companies adequate time and capacity to crisis manage and put plans into place,” Reynolds added.

The PRI continued that investors can also begin publicly signalling their support for a whole-of-economy response and should be vocal in saying that there must be a green and sustainable backbone to the stimulus.

The organisation is also setting up Covid-19 working groups focusing on short-term responses, and ensuring responsible ESG approaches remain at the forefront of investor activities and a future economic recovery phase, considering the how the financial system should function to ensure sustainable outcomes.

Academic research

Academic research has found that active US managers who are signatories to the PRI experienced an increase in fund inflows of 3.3% per quarter over the six quarters after signing vis-a-vis the pre-period.

Aaron Yoon, assistant professor, accounting at Northwestern Kellogg and Soohun Kim, assistant professor, finance at Scheller College of Business, Georgia Institute of Technology said in a paper that PRI signatories are more likely to be funds that are smaller, younger in age, and have higher historical alpha.

“However, funds that experience higher capital inflow do not exhibit higher ESG scores,” they added. “Overall, our findings suggest that most funds experience a flow increase after signing PRI while only a few make visible changes to ESG.”

They argued that this result may be because  funds signing up to PRI are already superior performers in ESG, so there is no reason to expect an increase in ESG performance from signatories. In addition, ESG is often hard to quantify and define so asset managers may not have a clear understanding of how exactly to incorporate ESG into the portfolio.

They concluded: “Asset managers may need mechanisms for clearer communication about their ESG execution especially with the tremendous amount of wealth and resources flowing into the ESG space.”