Untangling investment risks through an ESG lens
What happens when your commander-in-chief contracts coronavirus? In an era of Covid-19, a contentious presidential election and dizzying market gyrations, the risks just keep compounding.
The Covid-19 pandemic has caused financial-market perceptions of risk to swing wildly from one extreme to another in a short amount of time. The S&P 500 marked its fastest round trip—from record high to bear market and back to record high—in history.
Institutional investors have traditionally viewed risk in the context of statistical variation in returns over time or tracking error relative to a standard benchmark index.
Whatever your view of risk, it’s clear that many investors are taking a closer look at environmental, social and governance (ESG) considerations when analyzing portfolio investment risk, especially in light of the current pandemic. Our recently released 2020 Federated Hermes ESG Investing Survey highlights this fact, revealing that 63% percent of institutions, high-net-worth individuals and financial advisors surveyed believe social concerns during the pandemic are affecting the long-term risks of portfolio investments. Poor social behavior is bad for share prices, as we observed when U.K. fast fashion company, BooHoo, lost a third of its value embroiled in a worker-exploitation scandal involving poor pay and working conditions.
Investors also continue to consider long-term risks through “G” and “E” factors. In fact, 46% of survey respondents placed the highest importance on governance factors in the context of the 2020 investing environment. Governance failures, such as the alleged accounting fraud of the now de-listed German technology company, Wirecard, in June no doubt furthers these views. Additionally, fully 88% of respondents believed environmental actions of companies have importance for long-term financial performance. In our view, this continued long-term focus on “G” and “E” factors represents a shift towards greater inclusion of ESG as part of a fiduciary role.
With the continued spread of Covid-19, the upcoming U.S. presidential election and President Trump contracting the virus, financial markets will likely remain volatile in the short term. Weathering short-term volatility reminds us to evaluate the short- and long-term risks to capital preservation and wealth generation over time.
Incorporating ESG analysis can help investors by broadening one’s view of risks that could affect their portfolios.