Sustainable investing—the integration of environmental, social and governance (ESG) factors into analysis and decision making—has seen a remarkable rise over the past couple of years.
Starting from modest levels 15 years ago, it is now estimated at over US$30 trillion. So far, the outbreak of the Covid-19 virus has not stopped the growth of ESG investing, which has seen a steady increase in inflows and better-than-average returns since the start of the pandemic.
In a recent research paper, DWS argues that the pandemic is advancing the strategic case for sustainable investment. The question now arises whether ESG investing and its corporate equivalent, the integration of sustainability into business models, will become the new normal or whether the pandemic will eventually slow them down or derail them.
“
But irrespective of whether governments will support or slow down sustainable market practices through regulatory or fiscal interventions, corporations and investors that aspire long-term success are likely to increase, rather than slow down, their sustainability efforts.
The pandemic is far from over. Although we can only speculate about its long-term political, economic, and social consequences, we can already assume that it will change the framework conditions for markets for years to come. It is unclear which lessons politicians and citizens will learn from the pandemic. Some of the most pressing questions are:
Will the pandemic fuel strategic rivalries and lead to a messy and fragmented world with higher risks of hostility and conflict, or will big powers rediscover the benefits of rule-based economic integration as the best basis for peaceful coexistence and prosperity?
Will the desire to build more resilient markets supercharge economic nationalism and protectionism and lead to massive efficiency losses?
Will the economic setback in emerging and developing markets lead to unrest and humanitarian crisis situations, as poverty and hunger may stage a massive comeback, and will developed countries show compassion and solidarity or will they turn a blind eye?
Will the massive government funding now mobilised to counter the economic fallout of the pandemic fuel the climate crisis, or will it be employed to tackle both crises at the same time and thus result in healthier, cleaner and more resilient economies? Will social norms and consumer preferences be changed by the pandemic?
The spectrum of possible outcomes is wide. The pandemic is not only revealing the strengths and weaknesses of governments in coping with the crisis, it is also pulling away the curtain, shining a light on the fault lines, vulnerabilities and social inequalities across and within societies.
In an ideal world, one would hope for policymakers to make a fresh start and to collaborate, to invest more in vital public services and to revive markets through the promotion of clean energy and technologies. But policymakers often lack a moral compass.
Their decisions tend to be tactical and based on short-term considerations rather than informed by science. In the absence of genuine policy leadership, we may well anticipate growing regulatory divergences between countries and regions.
In the United States, for example, the pandemic has already been used as a coverup to abolish nearly 100 environmental regulations. In Europe, on the other hand, leading French and German policymakers are calling for more cooperation and have expressed the desire to use economic recovery to accelerate transformation as outlined in the European Green Deal.
But irrespective of whether governments will support or slow down sustainable market practices through regulatory or fiscal interventions, corporations and investors that aspire long-term success are likely to increase, rather than slow down, their sustainability efforts.
During the financial crisis of 2008/9, the world’s premier corporate sustainability and responsible investment initiatives, the UN Global Compact and the UN Principles for Responsible Investment (PRI), experienced an above-average increase in membership and a spike in engagement. The same is true in the current crisis.
Members of both organisations have been doubling down on innovation, decarbonisation and the building up of capacities to better manage ESG factors. “We have definitely seen an increase of engagement,” says Fiona Reynolds, the head of PRI.
It is only rational for investors and corporations to react to crisis situations with greater willingness to innovate and to put an extra premium on measures that build trust and enhance chances for a strong recovery.
As decarbonisation, digitalisation and strong social bonds are becoming dominant themes for survival and future growth, a growing number of businesses are now willing to exercise corporate statesmanship through policy advocacy.
The public call by over 150 executives, “Uniting Business and Governments to Recover Better”, and similar calls at regional and country levels, may well herald a major power shift within markets in favor of businesses that are willing to face up to the realities of the climate crisis and social imperatives.
Moreover, a closer look at the forces that gave rise to ESG investing and more sustainable practices prior to the pandemic—technology, natural boundaries and social norms—reveals that the pandemic itself is acting as an accelerator:
Technology
Technology has long been a key driver behind the sustainability movement by improving resource efficiency and facilitating the search for new business models.
For investors, technology—often based on machine learning and AI—has become the bedrock of ESG investing, enabling greater transparency and the quantification of performance of non-traditional factors that have an impact on long-term financial performance.
The pandemic has greatly boosted digitalisation across all sectors of the economy, and by doing so, it has strengthened the infrastructure and analytics that make up the sustainable investing infrastructure.
Natural Boundaries
The pandemic and the health crisis now ravaging all continents has put the spotlight on vulnerabilities and our dependence on the natural environment. It drives home the message that markets do not operate in isolation, but instead are embedded in societies and the natural environment.
This realisation will fundamentally change our long-term risk perspective and the way we prepare for the looming climate crisis. The lessons to be learned are loud and clear: prevention is better than cure, and decision-making informed by science is the way to build resilience and ensure future survival.
Social Norms
It is too early to predict behavioral changes caused by the pandemic and its fallout. But overall, it will probably result in strengthened values that underpin the sustainability movement:
First, social issues, such employment conditions, social safety nets and access to health services, will certainly move up on the agenda and reinforce the importance of the “S” in ESG investing.
Second, the pandemic has already given a huge push to the digital economy, which will have lasting effects on how we work and consume.
Third, the pandemic has heightened awareness of the close relationship between human health and the health of the planet, which may lead to greater respect for and appreciation of natural assets, such as clean air, water and healthy food.
Policymakers are now facing historic choices that will change the framework conditions for markets in a lasting way.
They have the power to foster cooperation and strengthen the bonds that ensure peace and prosperity, and they can ensure that the massive public funds now being mobilised are used to accelerate transformation towards cleaner, healthier and more resilient and inclusive outcomes.
As more and more investors and corporations are embracing good ESG performance as a strategic imperative, a window of opportunity is opening to “recover better”, at least in some parts of the world where the voice of reason is still alive.
But even if policymakers will fail their people, there is no doubt that the market-led forces that propel the sustainability movement will continue to gain momentum. Technological change, environmental imperatives and long-term social norm changes will propel ESG investing and corporate sustainability forward.
These trends are irreversible and global in scope. Governments can slow down or accelerate these trends, but they cannot stop them. Intelligent ESG investing is bound to become the new normal.
Those corporations that fail to transform their business models will be replaced by others that have the adaptive flexibility to thrive in a new world that values smart, clean, and healthy activities.
Georg Kell is Chairman of Arabesque & Founding Director of the United Nations Global Compact, and a member of the Eco-Business advisory board. This article was first published on Forbes and has been reproduced with permission.
