ESG considerations are set for a major makeover and overhaul in the light of the current situation writes William Tohmé, CFA, Senior Regional Head, CFA Institute, Middle East and North Africa (MENA), based in Abu Dhabi, UAE.
Seven months into the Coronavirus pandemic, there have been more than 16mn reported cases, including in excess of 660,000 deaths. The global economy is in severe contraction, shrinking by an expected 5.2% this year, while the Middle East and North Africa region is forecast to fall by 4.2%.
As the world battles to get back to normal, or the new normal, how businesses impact the societies they serve, including worker health and safety, as well as broader issues such as income inequality and discrimination are coming into sharper focus.
Given the extreme impact of Covid-19 on the world in such a brief period, many businesses appear to be viewing the crisis as a wake-up call to prioritize a more sustainable approach to operations.
Polls prediction
A recent JP Morgan poll asked investors from 50 global institutions how they expected Covid-19 to impact the future of ESG (Environmental, Social & Governance) investing.
71% of respondents responded it was ‘rather likely’, ‘likely’, or ‘very likely’ that a low probability/high impact event, such as the novel coronavirus, would increase awareness and action taken to combat high impact / high probability risks such as those related to climate change.
Some industry players seem to agree. Oil giant BP says the pandemic is likely to accelerate the transition towards cleaner energies, a view reflected in the company’s historic write-down of its assets in June.
In light of this, efforts by the United Arab Emirates to diversify its economy and move towards more sustainable energy, which we have previously discussed, appear prudent.
Moving beyond fossil fuels
However, the ‘E’ in ESG is moving beyond the low hanging fruit of avoiding fossil fuel towards greater levels of supervision in holding companies to account. For example, global asset manager, Robeco, plans to pilot satellite imagery to monitor palm plantations to verify companies’ commitment to zero deforestation.
While the existential threat of climate change has dominated the ESG agenda to date, the economic devastation wrought by the pandemic, which the World Bank forecasts could tip up to 60 million people into extreme poverty, means which aspect of ESG assumes importance is changing. Aligned to this are new social movements against discrimination that are becoming centrally important to corporate values.
And now these issues have become material to companies’ credit risk too. In July, the bond rating agency, Moody’s explicitly linked a firm’s stability to ethnic diversity measures for the first time. It described the programme at UK-based Lloyd’s Banking Group to promote more black employees to senior roles as ‘credit positive’ because the move will improve staff diversity at all levels and reduce Lloyd’s exposure to ‘social risk’.
At the beginning of the pandemic, some quarters predicted that when times got tough priorities would refocus away from ESG and back on the bottom line. The opposite appears to be the case.
Attitudinal changes
A recent survey from global professional services firm EY revealed that just 2% of investors said they conduct ‘little or no review’ of companies’ non-financial disclosures. That’s a dramatic change from 2013 when one out of every three investors claimed to be ignoring ESG data.
As attention to ESG factors across industry gains traction, it is also maturing. Increasing numbers of investment houses are launching circular economy funds, investing in companies that consider the life cycle of materials to encourage greater recycling, with a focus on limiting plastic waste. In July, we saw an important milestone in the maturation of the ESG investing market, with the launch of Refinitiv’s first-ever league table for sustainable finance.
Whatever way ESG goes post-pandemic, one thing seems certain – the issues at stake and its immediate repercussions are not going away.
