OLD MUTUAL INVESTMENT GROUP: Expert Opinions: Edition June / August 2020

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INVESTMENT LESSONS FROM COVID-19

JON DUNCAN

Head of Responsible Investment, Old Mutual Investment Group

Jon Duncan leads Responsible Investment (RI) at the Old Mutual Investment Group. The programme is focused on driving the systematic integration of material environmental, social and governance (ESG) issues across the Old Mutual Investment Group. Today Jon looks at some of the very real lessons that the COVID-19 crisis is teaching us on the investment front.

LESSON 1

Do not neglect the interconnectivity of social and market systems. The COVID-19 crisis has laid bare the very real interconnectivity between our social, environmental and market systems. An interconnectivity that is at the very core of responsible investing that recognises the impact of unpriced externalities on the safe operation of the market, society and environment. The lesson here is that all participants consider the wisdom of pursuing short-term returns at the expense of long-term resilience of social and environmental systems.

LESSON 2

Be aware of shared value. COVID-19 puts a sharp focus on management approaches to human capital management, corporate culture, and the treatment of customers. Corporate responses around these issues can potentially have lasting impacts for all company stakeholders. For investors that are ESG-literate, it’s no news that workforce management, employee satisfaction and corporate culture have a long-term impact on productivity, share price performance and returns. Similarly, that companies’ treatment of customers is an important driver of brand equity and improved customer relationships over time. How management teams respond in this time of crisis will be telling for their long-term profi tability.

LESSON 3

Be led by science. The fi eld of RI relies on much scientific data to make the business case for sustainability. Most asset managers with a focus on RI will thus have a clear understanding of the science behind climate change and the attendant risks and opportunities. Notwithstanding this, in the current age of populist politics, the role of science has increasingly taken a back seat. Now, while the COVID-19 crisis is more near-term compared to climate change, it is instructive to see how rapidly political leaders, despite their differing views, have fallen in line with prevailing medical and scientific consensus. The lesson of COVID-19 is–don’t forget the science.

LESSON 4

ESG is not just a nice-to-have. Old Mutual Investment Group has long maintained that analysis of ESG issues can, and does, drive long-term investment performance. It is not just a nice-to-have; it is a good-to-have. We see sustainability as a macro-thematic trend that is fundamentally reshaping the competitive landscape across all sectors. Companies that respond to this trend early enjoy stronger social licence to operate, lower staff turnover, better resource efficiency, lower cost of capital, better innovation and stronger access to market.

SO WHAT NEXT?

It is not clear what’s next. The COVID-19 pandemic is unprecedented in modern times. There is much we don’t know about how this will play out. However, what we do know is that the world will be much changed. Our sense of interconnectivity will be enhanced. We’ll have learnt that it’s not just returns that matter, and that businesses that focused on long-term outcomes will be the ones that thrive in the new world to come.

Worth noting: Like all funds, sustainable equity funds suffered large and sudden losses of value in the first quarter of 2020 due to the global pandemic. However, Morningstar reports that sustainable investment funds held up better than conventional funds during this period. They report that seven out of 10 sustainable equity funds finished in the top halves of their Morningstar categories, and 24 of 26 environmental, social and governance-tilted index funds outperformed their closest conventional counterparts. This is also evidenced by the MSCI ESG index tracker funds that Old Mutual offers, which have shown resilient performance over the past quarter. And, in Europe, ESG funds have seen persistent inflows, including recent weeks, even amid EU stock outflows.