To what extent could covid-19 form a tipping point for responsible investment’s growth trajectory?
That was the question Dutch asset manager NN Investment Partners (NN IP) asked a collection of European academics and portfolio managers.
The subsequent report, Who will shape a better future? Responsible investing after Covid 19, showed there was clear evidence ESG investing was gaining traction in 2020.
But the report stresses that; for momentum to build over the longer term; government, companies and individuals needed to interact more effectively.
On the up
In terms of attracting investor interest during a hugely challenging year, in general the response has been positive.
The report shows that the pandemic has placed responsible investing on a growth trajectory.
In Q1 2020, sustainable funds saw inflows of $45.7bn (€39bn), while the broader fund universe had an outflow of $384.7 bn.
That trend continued into the second quarter: when funds that apply ESG principles attracted global net inflows of more than $71bn between April and June 2020.
And despite the turbulence of early 2020, responsible investments have proven resilient in terms of performance.
Europe-domiciled ESG indices outperformed their benchmarks in the first quarter, and the top 50 most overweighted stocks by ESG funds outperformed the most underweighted by more than 10 percentage points.
Of course, this is a short snapshot – but it does provide support for ESG stock selection.
Seeing the bigger picture
Covid has certainly spurred policy debate about what a more inclusive capitalist system could look like and what the role of government could be, the report argues. Should governments use their power as an ‘investor of first resort’, or continue in their traditional role as lender of last resort?
Policies such as the EU’s Green Deal imply a proactive approach: a recovery strategy that emphasises investment in sectors and infrastructure projects that underpin the transition to a net-zero carbon economy by 2050.
However, the report suggests policy support designed to steer companies and investment in a more sustainable direction varies significantly by region.
In Europe, leadership in this area is strong.
The Green Deal and its action plan for sustainable finance will guide investors to better understand and prioritise investment strategies.
This includes establishing an EU classification system for sustainability activities and standards of practice, and a taxonomy for green financial products.
Government-driven responsible investing is also becoming common in Asia.
In Taiwan, for instance, responsible investing is a government-promoted initiative.
In South Korea, the government has taken a firm position on climate change, and Covid-19 has not derailed its plan for its own ‘green deal’.
But things are moving at a different pace in other countries – notably the US. The Trump administration’s abandonment of the Paris Agreement climate targets and its measures to defund environmental and social agencies have shifted responsibility for change away from central government.
However, with a presidential election imminent this position could change radically and quickly.
Shaping the future
Despite the current stance in the US, the report says that as a result of the pandemic, many governments are increasingly taking on responsibility as investors of first resort and are exploring ways to use financial resources to shape the future.
“Governments will now go to financial markets to make specific requests with a clearer purpose for responsible investing,” it says.
Products such as green bonds or recovery bonds may also be used to finance the mounting debt that governments are incurring to mitigate the impact of the pandemic and support the economic recovery.
The report adds: “The value that can be created by applying non-financial metrics such as ESG factors has often been neglected. But it is something that is required in order to build for the long term – especially in relation to climate change and social justice.
“Governments applying an ESG lens to the recovery brings opportunities for investors.”
These opportunities may be found in areas where infrastructure-related financing needs have additional environmental or social relevance – such as hospitals, schools and digitalisation.
“As investors, we should adapt to the new strategy or approach by the governments whose longer-term bonds we have in our portfolio, the companies we invest in, or the companies we provide loans to,” says Adrie Heinsbroek, head of the responsible investment team at NN IP and a contributor to the report.
The report concludes that while governments should facilitate a systematic effort to support sustainable and inclusive capitalism and investment – other key stakeholders need to act in union.
Providing a balance
However, the three groups – individuals, government and companies – do not always interact well.
Governments have elections to worry about; companies, often with a longer life span than elected governments, need to produce short-term profits; and individuals expect rapid change on all levels.
The asset management industry can step in here to provide a balance. It takes a long-term view, and it has oversight of financial market circumstances.
Asset owners and managers can be key players in the recovery, and they can shape it using responsible investing.
Heinsbroek adds: “As investors, it is our responsibility to assess how the key players – governments, companies and individuals – will continue to behave.
“They all have a role to play in this transition to a future-proofed economy. They can strengthen one another, but they can also act against each other if they aren’t well aligned.”
A recent discussion paper from Aviva Investors echoes many of the points raised by NN IP. It concludes that on the evidence so far, covid-19 will prove a watershed for ESG.
This is because crisis conditions have boosted the importance placed on ESG metrics and served as a powerful illustration of why a holistic approach to investment risk matters.
Paul LaCoursiere, global head of ESG Research at Aviva, asked: “Do investors need to keep focused on ESG as they navigate this crisis, particularly as some industries are focused on maintaining solvency rather than sustainability?
“In our view, the answer is ‘absolutely’ – because we expect ESG to continue to be a differentiator as society works through the crisis.”
He adds: “When we eventually get to the other side of this situation, we think the market will look positively on companies that have not sacrificed responsibility in the face of a crisis.”