Mega-cap tech hasn’t been the only growth rally the last couple of years. Environmental, Social and Governance (ESG) Investing has also seen considerable momentum over the same time period. As reported recently by the US Forum for Sustainable and Responsible Investing (US SIF), the total U.S.-domiciled assets using one or another form of ESG or Sustainable Investing grew 42% from the beginning of 2018 to the beginning of 2020. At $17.1 trillion, the number impressively represents 1 in every 3 dollars managed professionally in the U.S. The US SIF Trends Report considers two main aspects of sustainable investing: the incorporation of various ESG considerations in investment selection and shareholder engagement on ESG issues.
Sustainable Investing in the United States 1995-2020
That data in the chart above reflects the period before the COVID-19 pandemic. A question that has frequently come up since is whether the pandemic has further accelerated companies’ focus on and clients’ interest in ESG issues. According to the US SIF 2020 Trends Report, their survey of participants highlighted the importance of transitioning to a low-carbon economy, human capital management, diversity as well as health and wellness as some of the priority issues in the wake of COVID-19.1
While it might be challenging to quantify the impact of the pandemic’s influence on the ESG momentum, from the Sustainable Equity team’s perspective at Neuberger Berman, the pandemic has certainly zoomed in on social issues. Health and safety of employees, customers and operations, tackling income inequality that has been further exacerbated by the disparate impact of the health crisis on vulnerable populations or eradicating racial injustice/inequality in corporate cultures are some of the workplace issues getting more attention from companies. In addition, the pandemic has also brought to the fore any weaknesses in supply chains, where many of the social issues mentioned above are critical to ensuring a robust functioning supply chain. The chart below from the Workforce Disclosure Initiative (WDI), an investor initiative launched in 2017, identifies the top risks and opportunities reported by companies in 2019, across both Direct Operations and Supply Chains.
Top Risks and Opportunities Reported by Companies in 2019
Source: WDI Workforce Disclosures in 2019: Trends and Insights.
Disclosure of workforce data is still lacking, and lags behind publicly available environmental data even though investors acknowledge that workforce issues are material and critical for companies. In our view, examining workplace practices and identifying companies with leadership practices as it relates to diversity is indicative of a quality company. Given our team’s focus on finding high-quality companies, we assess workplace practices as part of our fundamental bottom-up due diligence of companies, and that includes focusing on all forms of diversity, including racial diversity. Last year, we signed on to the Workforce Disclosure Initiative2, to drive higher transparency by companies on workplace practices (more details here). This year, we have engaged with portfolio holdings on the topic of income inequality and upward mobility, particularly in the wake of the pandemic. Here is the link to a recent blog we published on this topic, including examples of portfolio holdings tackling the issue of wages.
As 2020 ends, we round off the year with optimism for life beyond the pandemic, but also a laser focus on the ESG issues the pandemic has further zoomed in on. As long-term investors and consistent with our process, we will continue to focus on assessing workplace practices and supply chain considerations, among other ESG considerations, in our assessment of businesses in 2021 and beyond.