With activists, the press, governments and now investors all demanding a cleaner and sustainable future for the planet, asset managers and individual investors are finding it a new imperative to include ESG factors in assessing investment opportunities for inclusion in their portfolios. To discuss the implications, Apex Group invited an expert panel to join its recent seminar, ‘COVID-19: Accelerating ESG Investment for a Resilient and Sustainable Future’.
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The growth of ESG
Since millennials have entered the workforce and the investment community, they have demanded an increased focus on sustainability and social responsibility. Expert panelist Bert van der Vaart, CEO and co-founder of SEAF, explained, “We’re seeing the effects of the younger generation. Millennials want to make sure that their businesses are making a positive difference. They want to make sure that their capital is allocated to things that are making things better.”
But while passionate ESG advocates have proclaimed this to be an inevitable shift, action from the traditional investment community has, until recently, been slow. Primarily, this is due to a perception that positive social impact comes at the cost of financial return.
This view is beginning to change, with growing evidence that, in fact, the opposite is true. As panel member and Managing Director of Apex ESG Ratings, Andrew Pitts-Tucker, pointed out, “Morningstar recently published a report showing that the majority of 750 European-based ESG funds outperformed the wider market over 1, 3, 5 and 10 years. This counters claims that ESG investments come with a return sacrifice.”
COVID-19 changes the pace
Whether we see it as a leap into the future, or simply the market catching up with societal progress, there is no doubt that the COVID-19 pandemic has rapidly accelerated the growth of interest in ESG investing.
There are multiple reasons behind this, Pitts-Tucker explained, “In my view, COVID has enhanced the ‘E’ factor in ESG by highlighting the benefits of a relatively pollution-free planet, but also the importance of biodiversity in a situation where we have seen the disease transferred from species to species, and it is as a direct result of us”.
“But, right now, the spotlight has really established itself on the ‘S’, on the social factor of ESG. I’m talking about human capital management. I’m talking about social justice. COVID-19 has really highlighted those two factors.”
This seismic shift comes with an evident financial impact. “During the COVID-19 pandemic, sustainable and ESG funds saw net inflows in Q1 of circa $45 billion versus the rest of the universe, which saw outflows of $380 billion,” Pitts-Tucker recounted, as evidence of a transformation in the market.
Rising regulation
Though a casual observer may conflate the rise of ESG investing with the progress of the pandemic, insiders are aware that there are other concurrent factors driving its growth. One key component is growing regulation at the national and supra-national level. Pitts-Tucker explained, “As of March 2021, the Sustainable Finance Disclosure Regulation imposes mandatory ESG disclosure obligations for asset managers, private banks and other financial market participants. Significant action is going to be needed to comply with this.”
Still, as van der Vaart described, there is a holistic relationship between the pandemic response and the increasing regulation of ESG. “On the government side, what we’re seeing is that many governments are running out of fiscal room, and that is leading them towards more regulation… they need to bring capital to addressing the biggest issues.”
Adapting to the new normal
It is one thing to note that we now find ourselves in a new normal of investing, but it is another to enact the necessary change to thrive in this climate. The panel shared various perspectives on what this involves.
“ESG is more than something that happens in the marketing department, it needs to be happening at the highest levels of corporate governance,” stated Zachary Cefaratti, Dalma Capital Management Limited Founder and CEO.
Pitts-Tucker agreed, “Companies need to be a step ahead, they need to show they are market leaders and that their credentials are solid before they’re forced to change en masse when legislation kicks in.” However, he feels that many businesses may be in a stronger position than they think. “A lot of companies, during conversations we’ve had, were quite surprised to hear that they are already ‘doing ESG’. They already have governance models, they have social and environmental policies which they’re implementing, but a lot of companies haven’t really appreciated that that is what ESG is all about.”
The difficulty of data
There are, of course, many challenges that businesses and financial institutions face in the ESG revolution, but one that comes up repeatedly is the issue of data. In the words of Pitts-Tucker, “Data is absolutely everything.”
Cefaratti described the challenge to institutions, saying, “A lot of these things are so hard to measure. These are qualitative factors. To assign a quantitative metric to them is not easy.”
And measurement is just one of the difficulties. Many businesses have questions about what data they should be collecting, how it can be collected, and what systems they need to make it useful. There is uncertainty about how it can be used to score and rate a company’s ESG credentials, and how helpful scores and ratings are.
From a reporting standpoint, there are numerous to entities satisfy with different KPIs and standards, from SASB to GRI and TCFD. Pitts-Tucker advised businesses: “Don’t pick one standard to align to. There are a lot of standards which you need to align to, to satisfy ongoing regulation and fiduciary reporting needs… use that as your starting point and then build on your KPIs.”
Facing the challenge
If your business is facing the challenges of ESG, such as measurement and reporting, or preparing for upcoming regulations, we can help. Our pioneering ESG Ratings and Advisory services offer enhanced insights to help you understand and improve the true performance of your business, in alignment with international standards. We offer a unique, secure, intuitive platform that delivers tailored analysis and flexile reporting.
Our global team delivers a comprehensive range of services to asset managers, capital markets, corporates, private clients and family offices. As a leading financial services provider with 45 offices around the world, we stand ready to support any business need.
To learn more about the services we offer, contact us today.
