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Sustainability and the impact of COVID-19

Investments
COVID 19 Coronavirus

August 13, 2020

Balancing the short and long term considerations of sustainability in the midst of the pandemic

Sustainable investing is about long-term, finance-driven strategies that integrate environmental, social and corporate governance (“ESG”) factors, effective stewardship and real-world impact in investment arrangements. We firmly believe sustainable investment is central to successful long-term investment outcomes – seeking better returns and lower risk. The COVID-19 crisis has reinforced our conviction in sustainability, and vividly highlighted the interconnected and interdependent nature of the world’s social and economic systems. The secretary general of the United Nations, António Guterres, summed this up when he said that “in our interconnected world, we are only as strong as the weakest health systems”.

In this article we provide an update on the impacts of COVID-19 on sustainable investment (SI) practices and the implications for investors looking ahead.

Balancing the short and long term, is critical to sustainable investment, and finding that balance in the midst of COVID-19 is a real challenge for investors. The constantly changing regulatory environment along with new initiatives and task forces adds to this test. However, the current environment does throw up interesting discussion points, some of which we have highlighted below.

  1. 01

    Focus on the S

    COVID-19 is an excellent opportunity to illustrate the ‘S’ in ESG and underlines the importance of giving sufficient time to thinking about all aspects of sustainability. It has often been easier to focus on Environmental and Governance issues (the ‘E’ and the ‘G’) with the former being dominated by climate change and the importance of the latter having been clear to the majority of investors for many years now.

  2. 02

    Resilience of ESG

It is also worth highlighting the relative resilience of assets with strong ESG characteristics to the recent market volatility. While it’s a relatively short period to judge and the impact of COVID-19 has far from fully played out, there are early signs of strong ESG investments performing better relative to the market as a whole. For example, data1 suggests that companies with better ESG ratings have outperformed the broader market index during extreme volatility in Q2 2020. This is just a small snapshot of a moment in time, but accretive to the evidence on the resilient nature of a sustainable approach on a macro and micro level.

  1. 03

    Responding to climate change

    Beyond the COVID-19 pandemic, an enormous challenge still lies ahead. We believe that climate change, and a just transition to net zero carbon emissions, is a systemic and urgent global challenge that requires specific risk management, opportunity identification and collective action.

    According to the World Health Organisation, climate change is expected to lead to changes in infectious disease transmission patterns

    According to the World Health Organisation, climate change is expected to lead to changes in infectious disease transmission patterns2, with climate change and biodiversity loss potentially increasing the risk of future pandemics3.

    Whilst the pandemic has in no way diminished the criticality of climate action and has painfully exposed vulnerable systems, it has also revealed some real possibilities for positive change in sustainability. The challenge is clear then to harness re-discovered values and keep elevated key issues of biodiversity, resilience, equality and connection.

    We support the recommendations of the Taskforce on Climate-related Financial Disclosures to provide greater disclosure of climate-related exposures. We have developed tools to help investors integrate climate-related risks and opportunities into their investment process, including climate change scenario analysis to identify both physical and transition risks and a sustainability scorecard to monitor portfolio exposures to different sustainability related risks that can be quantified.

  2. 04

    Implications for investors

    The COVID-19 crisis has highlighted that companies can no longer operate independently from societal and environmental issues, as they and investors recognise that these present clear financial risks. We believe that investors integrating ESG factors into their entire investment process may be able to improve portfolio resilience, by identifying sustainability-related risks and opportunities in their portfolio and then taking steps to address these. We provide some examples below of practical actions that all asset owners can take to embed sustainable investment practices into their approach:

    • Undertake training on sustainable investment, including the regulatory and legal context
    • Conduct a sustainable investments beliefs exercise to examine and benchmark current beliefs
    • Review and strengthen existing sustainable investment policies
    • Measure and monitor portfolio exposure to a broad range of sustainability-related risks and opportunities using a sustainability scorecard
    • Use scenario analysis to identify exposure to climate-related risks and opportunities under a range of different climate scenarios
    • Understand the portfolio’s carbon footprint and identify the risks and opportunities of a transition to a low carbon economy
    • Assess exposure to a range of physical climate-related risks and natural perils using catastrophe risk modelling tools
    • Incorporate ESG integration and stewardship practices as a decision criterion when selecting investment managers
    • Engage with existing investment managers to improve their approach to ESG integration and stewardship, and be prepared to replace them if they don’t
    • Join and help shape collaborative initiatives such as the Principles for Responsible Investment, Climate Action 100+ or the Thinking Ahead Institute

Footnotes

1MSCI ESG vs MSCI ACWI January to April 2020 (Source MSCI)

2https://www.who.int/news-room/fact-sheets/detail/climate-change-and-health

3https://www.carbonbrief.org/q-and-a-could-climate-change-and-biodiversity-loss-raise-the-risk-of-pandemics

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