ESG Investing For Dummies
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The term coronavirus, along with associated words and phrases, invaded our language in 2020, and it’s quickly become a route to brand self-awareness and questionable attempts at corporate caring, with many companies jumping on the new bandwagon. The very companies that have been called out as polluters, tax dodgers, and persistent outsourcers are now urging us to #StaySafe.

COVID-19 safety sign © Graphic Factory / Shutterstock.com

All companies, sincerely or not, have their corporate communications teams working on their new image as a public-spirited entity that has stepped up to help others during the pandemic, while trying to ensure that their profits aren’t further impacted than they have been already.

Those with short memories perhaps forget that these are some of the same companies that have contributed to and benefited from unsustainable use of natural resources, weaker public services, and the reduced standards of living that the pandemic has unfortunately highlighted.

Coronawashing on the corporate side

And so, “coronawashing” has started! As Winston Churchill was famously quoted as saying, “Never let a good crisis go to waste!” The PR machine is in overdrive, with companies highlighting how they are helping to fight the crisis while ensuring that they can’t be blamed for worsening it! Social media streams are catching every soundbite and any camera footage that can possibly be used to position their company in the soft lighting of good corporate citizenship.

Meanwhile, behind the scenes, the same companies are requesting government bailouts and leveraging the crisis to push for favorable legislation and reductions in regulations that are sometimes more necessary now than they were before. There has been an influx of consumer goods that are feeding off the fear of coronavirus, which highlights the stark reality that there’s no safer time for capitalism to excel than during a global pandemic!

However, while COVID-19 has propelled these issues, and the ESG pillars on which they stand, to the front of our collective thinking, sustainability is still establishing itself as a core business strategy, and many of the Key Performance Indicators (such as emissions, ocean plastics, water scarcity, and social engagement) are still pointing in the wrong direction.

Prior to COVID-19, the potential consequences of these issues still seemed too obscure for many companies to grasp. Some saw endorsing sustainability best practices as a “nice-to-have” rather than a vital element in their competitiveness and future success. Many organizations were still looking to maximize shareholder value in the short term, without thinking of their long-term corporate health and ongoing shift to “stakeholder capitalism.” And they are likely to be the firms that get caught out by "coronawashing" as they pay “lip service” to a short-term opportunity that should highlight their failings.

Coronawashing on the investor side

Company ESG objectives are one side of this story, but ESG investing will witness some of the outcomes. Skeptics had predicted that the booming investor appetite for ESG would wane when times got tough, while staunch supporters maintained that ethical and sustainable companies would prove more resilient. Thus far, evidence suggests that the supporters have been proven correct as green bonds and ESG share indexes have outperformed benchmarks.

However, some of these facts may implicitly be victims of “coronawashing,” as most ESG-focused exchange-traded funds (ETFs), which have seen the lion’s share of investor flows, are by their nature passive instruments that are heavily weighted toward companies that have proved resilient in the pandemic, such as pharmaceutical and technology companies. Indeed, given that a number of ETFs are based on indexes that use exclusion rules, to deliberately exclude companies failing ESG principles that have generally exhibited poor performance of late, they have indirectly dodged underperformance!

But investors need to observe closely what they are buying, as ESG scores within different indices are subjective, and not all indices are created with the same objective. Sometimes, ESG ETFs include shares that explicitly contradict how they are sold to investors. This is typically because the fund has been primarily designed to closely track the broad market, rather than be “fossil-free,” and is designed for investors looking to integrate ESG factors into their core investments without drifting too far from the overall profile of their benchmark index.

While ESG investing has become even more popular, and rightly so where funds are invested in firms that are expected to be more resilient to change in the long term, there is a caveat emptor (“buyer beware”). Ultimately, it’s difficult to know how the current COVID-19 crisis will play out or what effect it will have on sustainable issues. The current warm glow of bonding against the common enemies to ESG pillars suggests positive change for the future, but others propose that governments and organizations are focused on fighting the economic slowdown and will be diverted away from sustainable projects in the near future. Consequently, some of the support offered by asset managers and “talking heads” for ESG as a “safe haven” investment now verges on coronawashing, and appropriate risk management should be observed!

Furthermore, the “build back better” mantra post-pandemic needs to be considered carefully for all stakeholders. There is a view that this is a once-in-a-lifetime opportunity to reshape economies globally to be more environmentally sustainable and socially inclusive. However, the economic strain post-pandemic may cause a narrower focus on just getting the economy back on track, regardless of the environmental consequences that this may entail in the short term. It’s certainly a difficult balancing act, but the once-in-a-lifetime approach requires a global unity that may not be forthcoming.

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Brendan Bradley is co-author of FinTech For Dummies. He fosters and develops support for new ­investment areas, including AI-assisted research for automated modeling and transforming ­unstructured financial content in the ESG ecosystem.

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