Will social impact investing survive the global pandemic? Will sustainable investing trendlines shift?
Will ESG investing survive the global pandemic? A couple months ago I watched a panel of finance professionals who report on sustainability discuss trends in corporate reporting including emerging reporting frameworks. It was exciting to see the promise of investment as a lever for positive change and how far the field has come. However, as investors rebuild portfolios after we hit “bottom,” will ESG investing continue to be a growing trend?
The underlying premise of the panel presented by the Ethical Corporation by Reuters Events was it’s important for companies to understand what ESG is, how to improve, and where ESG reporting is headed. Comparing the historical returns of sustainable investment indices with conventional indices suggests that investing sustainably does not drag on performance. As an example, over the 28 year period leading up to September 2018, the S&P 500 index and the MSCI KLD 400 Social Index, the sustainable equivalent of the S&P 500, had similar returns and volatility to the S&P 500 index.
According to the Global Sustainable Investment Alliance, in 2016 $23 trillion of global assets (in USD) were managed sustainably. For context, the total value of the world’s 60 stock exchanges was $69 trillion (in USD) that same year.
Carrie Christopher, Director of Sustainability Reporting at Newmont Goldcorp, noted that companies with higher ESG ratings are more competitive, take on less risk, and have higher returns. Her company founded the International Council on Mining and Metals that has brought companies together to look at sustainability in their work and share results. They are collaborating with NGOs on reporting and management.
Anna Pot, Head of Responsible Investment for the Americas at APG Asset Management, said they want to see ESG be part of the corporate strategy, not just talked about in ESG reporting. It should be ongoing. There is active dialogue among their teams about corporate governance including remuneration, diversity, human rights, and climate change. Companies need to figure out how to navigate ESG reporting, Anna stated, but more importantly, they want to know how companies will benefit from ESG opportunities. What is happening on the ground? What is the impact of your policies?
Megan Fielding, Senior Director and Head of Strategic Partnerships for Responsible Investing at Nuveen, shared that it’s becoming an expectation that investment professionals engage in these conversations, when they didn’t use to. Some companies now have a dedicated sustainability leader.
Dan Shurey, VP of Sustainable Finance at ING noted that sustainable business is better business. ING has created tools based on the belief that companies with strong ESG factors have the strongest financial performance. In the past, sustainability was tied to marketing, but he said now it’s tied to everything. The goal is a low carbon, self-reliant society. Investors need to understand a companies’ long-term strategy. Forward-looking statements are more important than backward-looking. We’re going beyond sustainability in governance to treasury and finance departments. Strong ESG will lower the cost of borrowing.
With the massive government loans happening in response to the pandemic, lowering the cost of borrowing might be relevant.
In a study by the University of Connecticut, researchers found that 76% of investors assert that ESG has become a greater factor in their investment process over the last two years. This is particularly true for large institutional investors and for younger investors. While resources and budgets are more challenging for small-caps, they say it is critical for these smaller companies to communicate where you are in your ESG journey; investors are looking for progress, not perfection.
Current ESG reporting guidelines include GRI, CDP, SASB, and TCFD. Some guidelines focus on risk, impact, climate, social factors, and governance. Companies need to collect this data to do the reporting. Not all companies can report on every factor. Not everything is important to each company. It depends on the company’s market, sector, supply chain, and investors. ESG reporting is currently voluntary, but in time there will likely be consolidation in reporting standards as well as regulation on ESG reporting.
That is, unless the pandemic, upends this trend towards ESG investing. Your thoughts?
