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ESG (environmental, social and governance) considerations have been increasing in importance for investors in recent years and have been brought further into focus during the ongoing COVID-19 pandemic. Since the start of the pandemic, the knock-on effects of lockdown, including restricted movements of people and shutdown of industrial activity, have had significant impacts on global carbon emissions and the way we work. Now, as we consider how best to shape the economy coming out of the crisis, ESG considerations are again coming to the forefront of investment decisions.
COVID-19 and climate metrics
In 2020, the world is likely to see the largest annual drop in carbon dioxide emissions in history.
According to estimates by the International Energy Agency, as much as 2.6 billion metric tons of carbon dioxide will not be emitted this year as a result of COVID-191. China, the world’s largest carbon emitter, saw a 24% decrease in emissions over a four-week lockdown period2.
Although the decline will be temporary, it has given policymakers and companies a chance to increase engagement and spending on projects for a more sustainable global economy.
Even before the COVID-19 crisis, in 2019 U.S. renewables consumption overtook coal for the first time in 130 years3. Here in Australia, companies such as QBE announced they will no longer insure coal projects within the next 15 years4. Globally we are starting to see sectors and companies pull together to form zero emission initiatives, such as European shipping giant Maersk’s direct involvement in the development of zero emission fuels5.
A new sustainable economy?
As we see economies across the world begin to open up again, investors will have a chance to look for portfolios and companies whose practices align with their ethical values, which may include: less reliance on fossil fuels, better corporate governance and, partly as a result of the pandemic, increasing awareness of ‘Social’ (the S in ESG) factors as people start new flexible working arrangements.
The crisis is also likely to speed up the rate at which companies incorporate ESG practices into their business activities and dealings with stakeholders. Recent studies have shown that companies that incorporate ESG policies have outperformed the broad market, and this may be accelerated as we emerge from the pandemic in the coming years6.
An example of a company creating a more sustainable footprint is NextDC, Australia’s leading independent data centre, striving to power its data centres using renewable energy, including a 402Kw solar array in Melbourne. Overseas, Tesla continues to pioneer electric cars, battery storage and charging equipment, whilst steering the rest of the auto industry in the same direction.
Ethical options in Australia
The BetaShares Australian Sustainability Leaders ETF (ASX: FAIR), the BetaShares Global Sustainability Leaders ETF (ASX: ETHI), the BetaShares Global Sustainability Leaders ETF – Currency Hedged (ASX: HETH) and the BetaShares Sustainability Leaders Diversified Bond ETF – Currency Hedged (ASX: GBND) provide ‘true to label’ ethical exposures to companies and bond issuers that are well-positioned to thrive in a more sustainable and increasingly digital future economy.
In terms of carbon footprint, the number of tonnes of CO2 emissions per A$1 million invested in the S&P/ASX200 is 5X higher than the emissions from the same amount invested in FAIR7.
Stockmarkets around the world have experienced extreme volatility over the past six months as the COVID-19 pandemic led to a severe economic downturn.
However, amid this shock, ETHI and FAIR each outperformed the relevant broad market benchmarks, being the MSCI World ex-Australia Index and the S&P/ASX 200, by 9.6% and 3.2% respectively, over the 6 months to 31 July 2020.
To 31 July 2020:
- ETHI returned 20.0% p.a. from inception in January 2017, outperforming broad global shares by 9.7% p.a.
- FAIR returned 7.4% p.a. from inception in November 2017, outperforming the broad Australian sharemarket by 3.9% p.a.
Of course, it’s important to remember that past performance is not indicative of future performance.
Learn more about ethical investing.
Investing involves risk. The value of an investment and income distributions can go down as well as up. Before making an investment decision you should consider the relevant Product Disclosure Statement, available at www.betashares.com.au, and your particular circumstances, including your tolerance for risk, and obtain financial advice. An investment in any BetaShares Fund should only be considered as a component of a broader portfolio.
7. Based on portfolio weights as of 31/1/2020. CO2 data is the latest available (source Bloomberg, TruCost). Based on weighted average CO2 emissions (as defined by Scope 1 and 2). Scope 1 emissions are direct GHG (greenhouse gas) emissions from sources that are owned or operated by the company. Scope 2 emissions are indirect GHG emissions that are cause by the company through the consumption of imported heat, electricity, cooling, or steam.