Perspective

Managers' views

What is the role of ESG during the COVID-19 crisis?


Jason Yu

Head of Multi-Asset Product, North Asia

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The global economy has been experiencing dramatic changes since the fourth quarter last year. Apart from the acerbic Covid-19 outbreak, we’ve also witnessed negative oil price for the first time ever. These, coupled with factors such as geopolitical uncertainty, have caused governments around the world to launch QE and expansive fiscal responses at unprecedented levels, with direct interventions starting to take place. All these are signs of different mechanisms driving our economy’s development in today’s modern society.

How can investors thrive in today’s pandemic crisis?

Environmental, Social and Governance (ESG) has become a hot topic in social conversations nowadays. A number of ESG-related transformations, such as climate change, structural shift of crude oil demand, and even people’s daily habits, have accelerated as a result of the Covid-19 pandemic. 

While these changes are exceptional, it is an undisputed fact that our awareness and demand for ESG has been going up along with the pandemic. As evidenced by the changing demand of fossil fuels, it is expected that ESG will have implications on investment returns in the future. This will also speed up the transformation of financial assets’ return models. As a responsible investor, our future investment plans and attitude is top of mind.

As the famous Greek philosopher Heraclitus said, “Change is the only constant.” We always hold on to the philosophy that “A rolling stone gathers no moss” in our active asset allocation, and are always making swift and effective response to market changes as needed. In our opinion, flexible allocation through diversified strategies, active management and analyzing various risks from multiple perspectives are crucial to investors’ success. This is especially true when they are in an ever-changing investment environment.

How is ESG incorporated into multi-asset strategies?

When incorporating the impact of ESG on a multi-asset portfolio, climate change offers a very relevant point as the potential channels through which climate change could impact growth and financial returns are numerous. As a pioneer in multi-asset ESG and sustainable investment, we have already integrated this factor into our 30-year return forecast for different asset classes in our portfolio as early as February this year.

Take the expected performance of equities as an example; We found that the increase in temperature has an immediate and negative impact on equity markets broadly speaking. Even when taking into account the potential lagging effect, equities in most regions are still negatively impacted.  Interestingly, our study has shown that temperature rise will have a greater negative impact on the broader economy of regions that are hotter. These economies’ productivity growth could be negatively affected, thus creating an adverse shock to equities return.

Similar researches of this kind will be crucial in helping us understand the impact of climate change on expected return for each asset class, and effectively help us established our future investment strategies.

From an ESG perspective, a multi-asset approach serves the “integration” purpose. This enables us to act at the right time and place, and carefully select and allocate assets based on ESG and sustainability factors. Our aspiration is to build multi-asset solutions that are made up of assets that are fully in compliance with our ESG and sustainability standards while also meeting objectives from our clients.

What next?

In view of the current situation, we think the pandemic could have a very profound impact on the global economy.

Although some extreme tail risks have already been contained largely as a result of actions by central banks, this pandemic will continue to have an impact on our lives and investments in the short- to long-term.

It is expected that global financial markets will remain volatile in the foreseeable future, as the economic impact will depend on when the lockdowns can be lifted. In a situation where the market seems complacent, it is more prudent to remain cautious.

 

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