The Growing Role of ESG

Recent market turmoil suggests that companies with a strong focus on environmental, social and governance (ESG) factors may be more resilient during times of crisis. In this Q&A, Savita Subramanian explains why.

In the midst of historic market volatility related to the coronavirus, companies with strong ESG commitments offer a bright spot in an otherwise murky economic landscape, according to Savita Subramanian, head of Environmental, Social and Governance Research and U.S. Equity and Quantitative Strategy for BofA Global Research. As the pandemic intensifies global challenges such as food insecurity, access to healthcare and racial and economic equality, a strong focus on ESG could bring benefits to society, businesses and investors alike, Subramanian says. “Evidence suggests that companies’ health and society’s health may be closely intertwined and will likely be even more intertwined in the future.”

Here, Subramanian talks about the financial signals that appear to tie sustainability, social impacts and responsible governance to companies’ financial well-being.

Market volatility is nothing new, but what we’ve been experiencing this year feels different. What’s going on?

From February to March we experienced the fastest market downturn in history.1 But what’s really unusual is the nature of the crisis, driven by a deadly virus and the need for social distancing around the world. This is the first time in several generations that we’ve seen a global economic downturn driven entirely by a social challenge. When you look at it in the context of ESG, this has brought the “S”—for social—into sharper focus than ever before.

The corporate response has been fast and furious. From multinationals to small companies, everybody around the world stepped up their efforts to fight the impact of the virus. Textile companies shifted their operations toward making masks, financial companies exercised loan forbearance for consumers and businesses that were hardest hit, and many companies froze layoffs.

In addition to the social benefits these and other actions bring, it appears that looking out for the good of society can be good for companies, too. For example, based on aggregated client flows data, $8.2 billion was pulled out of equity ETFs when the S&P 500 index went from a record high in late February to bear-market territory just four weeks later.1 During that same period, the ESG funds tracked by BofA Global Research2 continued to attract inflows, suggesting that ESG fund managers were less pressured to sell stocks with strong ESG characteristics.

How are companies responding to the increased focus on ESG?

We’re seeing a significant jump in corporate ESG disclosure. Not only does every company in the S&P 500 today publish a corporate sustainability report, most have an ESG team aggregating company ESG data, knowing investors and other stakeholders are increasingly seeking out non-financial performance metrics. That wasn’t the case just ten years ago.

ESG is not concessionary if it’s practiced correctly. We believe it can help manage risk and enhance returns.

Savita Subramanian



We’ve informally considered such factors in our investment decisions for decades. But now we’re developing more systematic ways to assess companies with strong ESG records, as well as those whose poor records may create financial risks.

 

How is corporate America standardizing ESG policies?

As the benefits of ESG become clearer, corporate leaders are strongly encouraging their peers to adopt best practices in areas such as disclosing comprehensive ESG information and helping investors understand how to interpret it. Across the board, companies are realizing that having a Diversity & Inclusion program, and a fair representation of women on the board of directors, are going to be critical in attracting the best talent. And they understand that failing to adopt best practices may cost them—and their investors—a lot of money.

How does what you’re seeing during the pandemic align with longer-term ESG trends?

It’s hard to compare what we are seeing now with longer-term trends because of all the social and economic crosscurrents. In the midst of the healthcare crisis, we’re also experiencing an environmental crisis, and issues related to racial inequality and income disparity. The healthcare crisis has highlighted these issues—pointing a spotlight on endemic social issues that need to be addressed. It’s not only having impact in local communities, it’s informing local and national politics, the economy and the markets. So this is a unique moment in time, to be sure. That said, this crisis has only underscored the importance of ESG in guiding how businesses operate.

What lessons do you take away from all this?

For many, ESG investing continues to come across as a feel-good, concessionary investment strategy, where you give up returns to improve the world. But in fact, that’s the opposite of what’s going on. ESG is not concessionary if it’s practiced correctly. We believe it can help manage risk and enhance returns. If you look at this more holistically, ESG practices can create a culture of responsibility, sustainability and innovation; all of which can enhance a company’s long-term outlook.

To gain more ESG insights from Savita Subramanian, download a copy her report “Bull Market Phenomenon?” which discusses ESG investing during a bear market. And, to learn about Bank of America’s efforts to advance progress on some of society’s toughest challenges, explore more on Sustainable Finance.

  1. The S&P 500 closed at a record high of 3,386 on February 19, and was in bear market territory with a 2,398.10 market closing level on March 19.
  2. BofA Global Research’s ESG strategy team tracks 115 US-domiciled equity funds with an ESG focus (or “ESG funds”) by screening funds with relevant keywords, including ESG, Impact, Environment, Social, Governance, Responsible, Fossil Fuel, Conscious, Women, Gender, Climate and Sustain.

8/31/2020


Open Location
Open How we're involved