Coronavirus Pandemic Shifts Focus to ESG

The coronavirus pandemic has highlighted the importance of financial market risks that fit within the realm of environmental, social and governance (ESG) factors—namely disaster preparedness and health risks. Templeton Global Equity Group’s Maarten Bloemen argues we will see recently highlighted ESG considerations more acutely on the radar of investors, while other issues previously on the backburner due to coronavirus—such as climate change—will likely come back to the spotlight as this is a long-term structural issue which will need to be addressed. He opines on the state of ESG investing and where he sees values.

Global equity markets plunged in the first quarter of 2020 as investors struggled to weigh the impact of an unprecedented global economic shutdown stemming from the escalating coronavirus pandemic. The pandemic emphasized the importance of environmental, social and governance (ESG) factors, as we have seen evidence that the companies better prepared to manage these risks are likewise weathering the crisis better. For example, strong disaster preparedness, including supply chain management and business continuity planning, has been a hallmark of the crisis.

ESG investing has been growing in popularity over the past few years. We think the coronavirus crisis could draw even more attention to this space and bring more flows into ESG-focused funds.

At Franklin Templeton, ESG analysis is an inherent component of research and investment decision making. We believe the intersection of traditional financial measures alongside sustainability measures provides a valuable tool to differentiate between companies and sectors that are vulnerable to disruption and those that should be better equipped to adapt to shocks.

While there are different approaches to ESG analysis, we believe monitoring these issues can provide valuable insights that balance sheets or other financial metrics don’t reveal and help identify potential risks or vulnerabilities. The current crisis has highlighted some of these factors.

The graphic below outlines some considerations within each element of ESG for investors.