While 2020 will always be remembered as the year of the coronavirus pandemic, it was also a significant year for sustainable investing with ESG considerations receiving major global attention and action.
The acronym for environment, social and governance, ESG has its fair share of skeptics. But it is gradually giving way to acceptance.
When it comes to the ESG investing ecosystem, Hortense Bioy, the director of sustainability research at Morningstar, believes that three areas will grab the limelight. While she shared them briefly in this video, let’s look at her views in more detail.
- Climate change will continue to rise on the public and corporate agenda.
People no longer think of climate change as an abstract externality and something that is not going to affect them.
If there was a silver lining in the coronavirus pandemic, it is that it has forced many people and companies to think about sustainability issues and climate change in particular. The pandemic has taught investors that the global economy can be brought to a sudden standstill by a large-scale unpredicted event. A parallel can be drawn with climate change, now widely recognised as a large systemic risk that will affect the global economy, and one which may affect investment portfolios in ways we can’t yet fully imagine or predict.
Climate change has become perhaps the biggest sustainability issue for investment portfolios. Investors are increasingly aware that greater climate variability and more frequent extreme weather events could have considerable effects on businesses. They are also recognising that the world must transition from a fossil-fuel-based economy to a low-carbon economy sooner rather than later.
Ed Gillespie, co-founder and owner of FUTERRA, says that we are in a climate emergency. “We've fiddled around for 20 or 30 years, not taking the kind of significant and substantive transformative action required. And we are entering into an endgame, where we have 10 or 12 years to turn this ship around. And it's going to require massive reallocation of capital.”
- The S in ESG is going to be more prevalent.
Another ESG theme for this year is human capital management which captures issues such as diversity and inclusion, but also employee engagement and skills development.
The pandemic has not only exacerbated social and gender inequalities but also accelerated structural changes in labour markets. And what we are going to see this year is investors putting more pressure on companies to disclose how they treat their employees, how diverse the workforce and management boards are, and how well-prepared companies are for a future when new technologies will make a lot of jobs redundant and require rescaling a lot of people.
As Hortense mentioned to Reuters last year, the ‘S’ (in ESG) - which was kind of a bit forgotten, or not considered as important as the ‘E’ - now it’s emerging as an important dimension in this crisis.
The year 2021 will be one in which ESG really becomes mainstream; meaning, ESG consideration will become the norm when investing.
In an interaction, Thierry Bogaty, Head of ESG Development and Advocacy at Amundi, explained what going mainstream is: “It means that once you're convinced that an investment strategy is better off with ESG inside - taking into account environmental, social, governance issues – you embed it and it becomes the standard. From there, you can then develop specific initiatives if you want to have specific impact or thematic funds, but it is really about making it the norm to embed ESG within all asset classes.”
On the portfolio management side, Hortense expects the vast majority of managers to integrate ESG factors into the investment process. She also sees higher flows into ESG-focused and thematic and impact funds, helped by the fact that product disclosure will start improving, especially in Europe, thanks to a new regulation that requires asset managers to provide more information on how ESG factors inform the investment decisions and strategies.
The bump in the road.
This year, Hortense expects more companies talk about climate change and disclose more information and data on how it will impact the businesses so investors can make better informed decisions.
The lack of standardised data is viewed as a hinderance to the growth of ESG. But despite a few bumps in the road, companies and investors willing to forge ahead, even with the lack of consistent and comparable metric standards, will pave the way forward.
