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by UBS
The content in this infographic was relevant when it was published on 18 June 2020.
Current views may differ.

Whilst the other megatrends represent an acceleration or deceleration around the pivot of the pandemic, Covid-19 is at heart an environmental, social and governance (ESG) issue. The dysfunctional relationship between humans and the ‘environment’ is likely to have been a contributing factor to the appearance of the pandemic. Strong healthcare systems and equitable access to treatments are central to how individuals and ‘society’ will cope with and recover from the pandemic. And corporate and state ‘governance’ will be assessed as to whether it is sustainable and equitable. Historically, the factors behind the performance of ESG indices have been more closely aligned with ‘E’, particularly carbon emissions.

The European Commission’s allocation of a quarter of its €750bn recovery fund towards a ‘green recovery’ suggests the importance of environmental concerns will not decrease.

However the effect Covid-19 is likely to have on income and health inequality has increased the focus on the ‘S’ and the ‘G’ – adding to evidence that company attitudes towards employees and customers have recently joined relative carbon intensity to become significant performance drivers of ESG.1

It is increasingly becoming evident that investing in higher-rated ESG companies does not compromise returns, although the overall effect of ESG ratings on performance remains mixed. There is a high correlation between ESG indices and “minimum volatility” in most markets, and “quality” in the case of Europe and emerging markets.2 Indices have not lost value relative to the market – even through the recent turmoil – regardless of region.3

Stocks with high ESG scores have tended to outperform stocks with low ESG scores
Top and bottom ESG stocks return: Indexed to 100 as of May 2015
Bottom Third
Top Third
110%
105%
100%
95%
90%
85%
80%
2015
2016
2017
2018
2019
2020
Return - Top Third: 0.15%, Bottom Third: -2.75%
Volatility - Top Third: 4.3%, Bottom Third: 5.0%
Cumulative Return
Source: UBS Quantitative Research, Universe is MSCI World and portfolios are adjusted for value, size and momentum

Flows into ESG ETFs continued to rise even as other flows fell off during the market tumble sparked by the spread of the pandemic.

Covid-19 has shone a spotlight on many topics relating to ESG, which should in turn accelerate demand for ESG data, services and products.

ESG ETFs: Quarterly net flows in USDm
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
-2,000
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
4Q19
1Q20
2Q20*
EuropeUSAJapanAsia ex-JapanOthers
Source: Bloomberg, UBS. * 2Q20 data shows the flows between 1 April 2020 and 5 June 2020.

A possible shift towards stakeholder capitalism has been discussed for some time, but what’s new is that financial flows are moving in different ways in reaction to the real-world effects of the crisis, and UBS does not expect them to return to their former course.

Sources:
1. UBS Quantitative Research. Significant at a 5% significance level. *Environmental supply-chain incidents. Universe is MSCI USA and MSCI Europe.
2. MSCI, Datastream, UBS. Note: Based on weekly returns relative to the market, weekly data for past five years. Data for MSCI indices. EU = MSCI Europe.
3. MSCI, Datastream, UBS. Note: Price and valuations data as 16 June 2020. Volatility calculations on month-end data.
by UBS

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