Has COVID-19 killed responsible investment?

Many people are asking me this question at the moment.

My answer: whilst there is, and should be, an initial short term focus on financial sustainability, what I am actually seeing is new capital investment putting even greater emphasis on Environment, Social and Governance (ESG) criteria as opportunities emerge from likely new regulation and new technology.

What I’m seeing?

To set some context, there are a few key observations around the current crisis in relation to ESG:

  • Pre-COVID, and in the aftermath of some global extreme climate events, we were seeing ESG investing surge as the environment and climate change became top concerns for society, industry and government.
  • Greenhouse gas emissions have significantly dropped as a result of COVID due to reduced economic and social activity but this is only temporary.
  • So far, ESG investments appear to be at least, if not more, resilient to the economic consequences of COVID.
  • Society is having a period to reflect on what really matters to them.

So what might happen next?

Almost every crisis is followed by a period of new regulation and new technology. I don’t expect this crisis to be any different. Post this crisis, both are likely to accelerate new investments in ESG however I do expect affordability challenges from weak economies and “old” invested capital will slow down some of this transformation to a full ESG world:

Accelerating ESG investment

The speed at which this crisis appeared has required many to innovate quickly. Many of these innovations have forced people to do more with less driven by financial necessity. However many of these innovations have also shown that better financial outcomes are consistent with better environmental and social outcomes. The obvious example here in Australia is travel: both air and land travel.

Whilst we are still in the early days of the crisis, initial indications from the capital markets show that ESG investments are performing at least as well as mainstream funds and new capital is continuing to flow into ESG investments. Where would you put your money in a crisis other than under the bed? The search for long term, resilient businesses that are not susceptible to changes in social expectations, new disruptive technologies or future regulatory change are at a premium at the moment.

Real short term challenges need to be dealt with first

Of course it’s more than short term health and economic challenges that have to be dealt with and these are having very real impacts on the wellbeing and jobs of individuals and their families. The crisis has also had a profound negative impact for many industries and businesses – from airlines to construction firms, many of which may face closure. Those that do survive will be under significant pressure to keep their heads above the water. Customer re-engagement, cash flow management and servicing debt are immediate top priorities. Environment and climate change will be a lesser priority during this immediate recovery period, as efforts will be focused on financial viability.

However, many businesses need recapitalisations and new money often comes with new views and expectations. New investors are unlikely to be willing to throw good money after bad. They will want to ensure that their new investments survive not only the short term but also the medium to long term. New private capital may be looking for improved ESG performance, especially where the funds are coming from the long-term focused pension funds. New public capital from governments may expect social dividends from any “bail out” money such as through reduced emissions or greater environmental resilience.

Even where governments do not provide new capital, they can and often do, impose new regulations after a crisis. We will surely see new regulations for higher levels of stocks of critical medical equipment but will we also see new regulations and targets over our scarce resources such as land, food and energy?

So what are the implications for ESG?

Whilst the current crisis is devastating many lives and livelihoods, in some way it will be a wakeup call to the consequences of climate change: the difference being that we are feeling the pain of COVID over weeks and months whereas the pain of environmental degradation and climate change will accumulate over years and decades. Unfortunately, I expect the net outcomes of climate change will be far worse than COVID, even under some of our desired scenarios such as a 2 degree world.

All medium to long term investors know this and ESG investment is one way for them to manage this challenge.

The short-term focus will be on rebuilding the industries badly affected during the crisis. But in the medium to long-term, climate change and sustainability will return to be key priorities for individuals and businesses.

So has COVID 19 killed ESG? No. ESG criteria is, and will be, a competitive and differentiating factor in accessing capital in the post-COVID world.

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3 thoughts on “Has COVID-19 killed responsible investment?

  1. Absolutely! COVID has definitely triggered more interest in Responsible Investment – uncovering another risk area for investors to consider, testing governance processes and HR policies, and challenging entrenched assumptions on resource use, employee mobility, and the value of human capital. Further to this, corporate behaviour in this crisis has enabled us to identify those who understand their social license, and those who still don’t get it. This will become clear reference point for investors looking to capitalise on firms demonstrate both financial sustainability and strategic understanding of their role in society.

  2. Great article Adrian – in addition to ESG being relevant for medium-to-long-term investments, we need to adhere to some minimum ESG requirements for short-term investments and especially for the planned recovery infrastructure spend earmarked for accelerated approval. If we don’t, we run the risk of creating a legacy of underperforming assets with higher long-term operating costs and poor community amenity.

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