THE upheaval in the global economy and financial markets brought about by the Covid-19 pandemic is making environmental, social, and governance (ESG) investing the new normal for asset owners and asset managers.
The reason is the pandemic has shown that ESG investing or sustainability investing provides the only efficient way to allocate resources in a world beset by disease and natural calamities in the short to medium term, as well as by climate change in the long term.
“The pandemic is a stark reminder that without healthy people, without a healthy planet, there will not be a healthy economy. People, profit, and planet are all connected. One must not come at the expense of the other. If you push the balance too far off centre then you have to be prepared to pay the price as we are now,” says Fiona Reynolds, chief executive officer of the Principles for Responsible Investment (PRI) during an event entitled “The Role of ESG in a Decade of Disruption.”
This means ESG portfolios will become the standard for investments in the medium to long term as the world transitions from the pandemic to the post-Covid-19 era bringing with it massive changes to asset allocation, benchmarking, investment strategies, as well as overall investor attitudes and behaviour.
It also means accepting the linkage between ESG investing and the risk of climate change, something that has been seemingly set aside by the sudden eruption of the pandemic.
“I really believe the new normal is to have ESG portfolios as standard portfolios. The reason is just very simple. If you look at climate change evolution over the next 10 years our world as we know it is completely unsustainable. If you combine that demographic trend with an enormous increase in population, as well as the development of technology in a very low (interest) rate world, it’s very clear that ESG investing is the only option to allocate capital efficiently to where growth opportunities are going to be, but also where sustainability is going to be,” says Virginie Maisonneuve, founding partner of MGA Consulting and Advisory Council Member of Future of Finance (CFA Institute) during the same event.
This means investors and portfolio managers will have to work on benchmarks and strategies that are more suitable for ESG and sustainable funds, as well as to have better alignment between investors and portfolio managers in identifying opportunities for portfolio investing, Maisonneuve says.
At the same event, Mark Konyn, group chief investment officer of AIA, says as fiduciaries, asset managers have been dragging their heels a little bit when it comes to ESG or sustainable investing because they tend to be more focused on business outcomes.
“They have often compartmentalized their approach to ESG and offer separate ESG services that adhere to ESG standards. But for all other clients that aren’t interested those things carried on pretty much as they were. That’s been the sort of paradigm in which they have operated. The reason for that being it’s up to the asset owners to stipulate that they are sensitive and interested in ESG considerations,” Konyn says.
Konyn argues that the time has come for asset managers to really push beyond this attitude of taking direction from asset owners when it comes to ESG or sustainable investing.
“I think as fiduciaries they do have a responsibility for their actions and for investing and allocating capital responsibly that go beyond just basic instructions from an asset owner. And really, they need to step up and demonstrate that they consider this important. And it’s fast becoming very important from a sustainability perspective,” Konyn says.
Unless asset managers take a serious approach to ESG or sustainable investing the risk is that they may end up investing in businesses that become unfashionable, or have assets that can no longer attract the valuations that they have historically and underperform as an asset manager.