The long-term consequences of various events over the past year have brought home the importance of integrating environmental, social and governance (ESG) opportunities and risks into our investment process.
Having profoundly changed our lives, the COVID-19 pandemic will undoubtedly be a defining moment of our lifetimes. Beyond its devastating tolls on human health and employment, the pandemic has also affected portfolios from both an investment and ESG perspective. The economic disruptions produced major market volatility while magnifying social inequalities and increasing scrutiny of corporate policies around employee health and safety.
We have also witnessed further evidence of the impact of climate change on the environment. Shifting weather patterns produced more frequent and intense storms while wildfires ravaged millions of acres of land worldwide. These were reminders that global climate risks not only affect us all personally but can have material long-term financial implications.
There have been positive developments as well. Companies are increasingly taking action to reduce their environmental footprints by putting policies and procedures in place to lower carbon emissions, use energy more efficiently and decrease waste. We also are seeing innovation across many sectors of the economy that may help reduce climate change risks. These range from the continued rise of electric vehicles to carbon capture technology and the prospects of green hydrogen as an energy source.
Climate change, public health and safety, social inequality—these are key opportunities and risks that we cannot ignore from an investment perspective. We believe integrating these factors into our investment process leads to better decision-making and improved outcomes for our investors.
Looking ahead, we are encouraged by the commitments that businesses are making at many levels. And we highlight several in this report. While ESG investing continues to evolve, our core beliefs remain:
- Companies with both improving business fundamentals and risk management of material ESG issues will likely outperform their peers over time.
- ESG analysis complements traditional financial analysis and results in a more comprehensive understanding of risk.
- ESG integration, rather than exclusionary screening, leads to better diversification and a more robust opportunity set.