While the pandemic’s economic impact continues to reverberate through global markets, its health and humanitarian consequences and its likely origin have intensified focus on environmental, social and governance (ESG) investing.
ESG investors have traditionally focused on corporate governance, says Nedgroup "Investment’s Responsible Investment Research Report".
"There is limited evidence to support environmental and social factor adoption in investment processes, despite the widespread stated belief in the impact that these factors can have on a company’s share price," says David Levinson, investment & responsible investment analyst at Nedgroup Investments.
"The Covid pandemic has served to heighten the ESG agenda and forced companies to contemplate more deeply what their role is in society."
In his annual letter to clients in January 2021, BlackRock chair Laurence Fink says: "The pandemic has presented such an existential crisis — such a stark reminder of our fragility — that it has driven us to confront the global threat of climate change more forcefully and to consider how, like the pandemic, it will alter our lives. It has reminded us how the biggest crises, whether medical or environmental, demand a global and ambitious response1 Global Sustainable Investing Survey of September 2020 reveal that sustainability considerations are becoming a central aspect in investment approaches.
"Investors recognise the importance of sustainable investing to risk-adjusted returns and are backing up this conviction with their asset allocation plans." Respondents plan to double sustainable assets under management in the next five years2 sustainable investing strategist at UBS, says: "The notion that investing sustainably comes at the expense of financial returns is gone. Global indexes show sustainable investments deliver risk-adjusted returns on par with or better than their conventional peers. This is largely due to exposure to key themes such as green technologies, and to quality companies that actively manage risks and opportunities while benefiting from favourable regulations on environmental and social issues."
Premal Ranchod, head of ESG research at Alexander Forbes Investments, says: "We believe global asset allocations toward ESG-themed products are in the region of $30-trillion. Local investors understandably want to benefit from this momentum, but we caution against allocations based on the herd effect, which is an investment bias."
Victoria Reuvers, MD of Morningstar Investment Management SA, adds: "Taking a ‘plug and play’ approach to ESG, where an adviser picks a handful of ESG funds and replaces the conventional holdings like-for-like to meet investor preferences is a common mistake.
"This approach can create a portfolio profile that can deviate considerably from the desired outcomes. Effective sustainable investing requires an additional layer of data and analysis [added] to traditional strategies. ESG analysts evaluate a company on a range of factors, typically rolling up scores into simple metrics investors may use when making decisions."
The pandemic also highlighted the need to directly tackle systemic risks such as biodiversity loss. Tracking the origins of Covid-19 has highlighted how habitat encroachment creates opportunities for animals to transmit zoonotic pathogens like the Covid virus to humans.
"Natural habitats provide enduring benefits and ecological infrastructure for biodiversity, people and the economy. But environmental sustainability requires investment and capacity resourcing beyond donor funding," says Candice Stevens, chair of SA’s Sustainable Landscape Finance Coalition.
Economic growth and environmental sustainability are not mutually exclusive, believes Stevens. "With the right approach and investments, they can progress hand in hand. When we invest in sustainability, we realise longer-term returns while also addressing environmental risk factors such as water scarcity."
While investors often fail to see past the upfront costs related to sustainability initiatives, Stevens affirms that restoring natural resources or managing them properly delivers exponentially greater yields, and these initiatives often become self-sustaining.
Rather than an immediate return, these "green" projects deliver downstream economic yields, along with environmental and social returns such as job creation, disaster risk mitigation or resource sustainability. "Shared value is the ultimate goal," says Stevens. "We aim to deploy capital to look after our natural resources, rather than deplete them."
1 BlackRock, January 2021
2 BlackRock, September 2020
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