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ESG Faces Tests From A Pandemic World Swimming In Oil

What’s happening? Investor fears amid an oil price war could negatively affect ESG funds, with many asset managers never experiencing their ESG commitments running into price crashes and spooked clients, reported Bloomberg Quint.
 
Why does this matter?  Despite the rise of ESG investing as it exists today, the strategy is yet to be tested in a real-life downturn.
 
Markets are currently being rocked by the impact of the now-pandemic Covid-19 coronavirus, combined with an economy due to be flooded with oil following OPEC and Russia’s squabbles and Saudi Arabia’s decision to turn on the pumps.
 
Despite these wider conditions, some ESG funds may be glad of a lack of exposure to what continues to be a volatile oil market, with potential further implications for oil majors’ cash flows. Yet, cheaper oil could reduce the competitiveness of low-carbon energy investments (alongside making some high-polluting assets, such as oil sands, uneconomic). Investors will no doubt carefully be weighing up their options amid this complexity.
 
The coronavirus, and political responses to it, compounds the uncertainty. While the outbreak might have an immediate short-term positive effect on emissions, longer term the financial implications could mean corporates look to scale back their ambitions on ESG. Korn Ferry suggests the virus marks another test for sustainable investing and corporates moving beyond shareholder primacy, as they batten the hatches and focus on keeping operations going. How firms treat their workforces during this time will be a good demonstrator of their true values.
 
Will these events lead to the first true test for ESG? Ultimately, dismissing non-financial data to screen out stocks could lead to investments that are not geared up to effectively weather the current storm and which may be less structurally sound to ride those to come in the future.
 
Lateral thought from Curation – The Bloomberg SASB US Large Cap ESG Index dropped 7.2% on Monday, compared to the S&P 500's 7.4% fall. This demonstrates a wider response from investors to risk but, also, given the lack of a material difference in the numbers, that ESG indexes have some work to do to differentiate themselves from standard products. In this lens, the creation of effective ESG metrics and benchmarks is, as ever, critical.

Nick Finegold is Founder & CEO of Curation Corp, an emerging and peripheral risks monitoring service.

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