Could the ESG Sector Lead the Recovery of the COVID-Economy?
16 Pages Posted: 20 Sep 2020
Date Written: September 18, 2020
The June 2020 outlook for the world economy, forecast a ‘synchronised deep downturn’ much worse than the 2008 crisis and ‘an uncertain recovery’. The impact of ‘lockdown’ on economic activity had a profound effect on the fortunes of firms, households, and entire industries around the world. While some sectors were buoyed by the sharp growth of home-based online working and entertainment; an overwhelming majority experienced significant contraction as demand stalled. The likelihood of large-scale corporate collapse and structural decline of industries have drained investor-confidence and have confined capital to the side-lines. With the fiscal multiplier suppressed by significant firm-exits and job-destruction; conventional fiscal stimulus could prove to be less effective than expected. This raises urgent questions about which sectors would be able to remain sufficiently intact to lead a sustainable recovery. During the tumultuous early months, while broad market indices were experiencing dramatic swings, firms with high ES ratings were observed to have higher returns, lower volatility, and higher profit margins. While the low exposure of ESG portfolios to oil and commodity markets may prove to be a partial explanation for these early observations; the preservation of ES credentials can contribute to the resiliency of supply chains (as a direct result of meeting ESG requirements) and invoke higher confidence among investors. ESG firms can also attract higher consumer loyalty that the pandemic has accelerated, as people place a greater emphasis on the quality of the environment. Based on recent and earlier works we put forward the argument that the ESG sector has the potential to attract substantial private investment (not only impact-first, but also financial-first) in the covid-economic environment and contribute significantly to a sustainable recovery. We also discuss the impediments to ESG investing, including the stability of the policy-environment and the problem of ‘green financing’.
Keywords: ESG, impact-investing, green-economy, recovery, COVID-19, fiscal policy
JEL Classification: E32, G11, Q50
Suggested Citation: Suggested Citation