Sep 21

ESG Investing is Now the Mainstream, Deal With It

Editorial Staff
May 8, 2020
Photo by RawFilm on Unsplash

Sustainability is set to become one of the major factors in the post-pandemic corporate environment. Intimidated by the impacts of human activities on nature, companies will adjust their behavior in order to avoid disruptions of the current scale in the future. This shift promises to elevate the role of environmental, social and governance (ESG) policies from being a mere aspect of any successful speech at Davos to the crucial mark of an effective business strategy. Sustainability will likewise trigger changes in investment strategies that will almost universally apply the ESG filter in decision-making.

The COVID-19 pandemic will deliver multiple shifts to the corporate world. In the near future, we should see a toughening of legislative norms and increased cooperation on environmental issues throughout major global markets. Nations that have experienced the consequences of breaking production chains, the real risks of shortages of essential commodities and a record increase in debt will take more aggressive steps to protect the environment and shield themselves from the same disruptions in the future.

In the past, we talked a lot about the threats of releasing of an unknown harmful bacterium or virus because of the melting permafrost and destruction of the wild habitat, but very few actual measures were actually implemented. Now, risks of this kind will be addressed more seriously.

In 2018, the Danish pension fund PKA, with some $46bn under its asset management, excluded 35 oil and gas companies from its investment portfolio over failure to live up to the goals of the Paris climate agreement. In 2019, Swiss Re announced that it is switching the entire $130bn it holds in liquid assets to track ethical indices based on ESG principles. Although quite notable, these examples were still largely isolated cases. After the crisis, the situation will be different. Commitment to ESG will likely become more widespread and will become a major avenue for exerting a positive influence on other markets and companies where sustainability goals are lagging.

Growing popular support for the ‘green’ agenda throughout Western countries and other parts of the world will be propelled by the traumatized populations and further boost concerns about the sustainable future.

Over the past few years, consumers and investors have already learned to boycott the products of “unethical” companies. Currently, ESG-focused investors are increasingly seen to judge companies on their coronavirus response. Soon enough, this will impose greater pressure on both officials and businesses to recalibrate their approach and address environmental fears. In effect, the pandemic will drastically reconfigure corporate perceptions of sustainability and reinforce lasting beliefs that investment and value creation should deliver much more than simply financial returns.

Companies with ESG practices integrated into their business model are performing better than those who have ignored ESG, and they’re leading others by example. Corporate ESG began with global commodity players, then switched to large local, then non-commodity players, and tomorrow it will be on the agenda of small and medium-sized businesses. The transformation of corporate strategies and the adoption of global standards will be one of the main criteria for cooperation, investment and customer acquisition and will help prevent or mitigate future crises. For instance, surging unemployment has already pushed ESG investors to scrutinize executive pay like never before, according to Bloomberg.

In April, research by the Morgan Stanley Foundation found that the issuance of green ESG bonds was 272 percent higher than the same month the year prior, with the total issuance figure totaling $48.5bn.

Compliance with ESG principles will gradually become one of the key criteria for companies to build relations with major investors. The widespread adoption of the so-called ESG filter among the largest Western companies and investors will be one of the determining factors in business cooperation. In May, S&P Global Inc. announced that it kicked out big-name companies such as Twitter, Walmart, Equifax and others, and added others to the ESG version of its bellwether S&P 500 index. This move will most likely impact a growing swath of investments tied to the benchmark.

Rising sales of debt to pay for the fight against the COVID-19 pandemic may fuel higher demand for so-called social bonds. In the Asia-Pacific region, the issuance of these securities to fund projects with positive social benefits has already reached $5.2bn so far this year, or nearly 90 percent of the total in 2019, according to BloombergNEF data. As the pandemic recedes, public demand to address social issues may further impact investor behavior.

Public concerns will also alter the behavior of institutional investors. In 2019, stocks of companies with strong ESG strategies have already performed strongly. In fact, global green bond issuance last year hit an all-time high: 479 green bonds were issued by companies, governments and financial organizations, up from 382 in 2018. Bank of America Corp. estimates investors will pour an astonishing $20tn into ESG funds over the next 20 years, and these inflows will hit new records in the U.S. and Europe.

In the post-pandemic world, companies that were already committed to ESG might benefit even more, and will have an edge in the de-facto race to sustainability.

The new paradigm will further affect the value of shares in the stock market, as well as the possibilities of obtaining loans and formats of interaction. In May, Global investment manager Federated Hermes surveyed 200 UK IFAs and found that 85 percent have seen a rise in client requests to allocate capital to ESG-integrated funds since the start of the coronavirus outbreak. Furthermore, 82 percent reported an uptick in enquiries from investors about how their capital can be committed to combat the effects of climate change, raise governance standards and improve human rights.

All in all, ESG principles are set to become an integral part of corporate culture and will smoothly move from the periphery of development models to the center of investors’ and consumers’ attention. The reputation and investment attractiveness of companies will increasingly depend on their level of environmental friendliness and social responsibility.

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