Finally, Some Good Financial News – The Pandemic is Accelerating Growth in ESG Investments

Finally, Some Good Financial News – The Pandemic is Accelerating Growth in ESG Investments

The impact of the current slowdown in economic activities worldwide has been generally negative and depressing. The world economy has fallen into a recession, practically every sector of the global economy has been affected and the ripple effects of this impact can neither be overstated nor ignored. At the onset of all this, early estimates had warned that if COVID-19 became a global pandemic, major economies of the world could lose up to 2.4 percent of their capital worth. Well, now we can all agree that the deep recessions triggered by this pandemic is set to leave deep scars on global investments generally, for years to come.

Despite the foregoing though, there are undeniable silver linings from this catastrophe because situations such as this always presents humankind with unique opportunities to start afresh and grow in a better direction. Examples of this are the growths in the African tourism sector and in ESG investments during this pandemic.

For context, ESG stands for Environmental, Social, and Governance. And so ESG investments simply means the integration of environmental, social and governance factors into the fundamental investment process for any venture. Put differently, rather than applying the regular financial metric which most private individuals and companies solely resort to in reaching their investment decisions, with ESG investments, most investors now consider the Environmental, Social and Governance ratings of the venture they are set to undertake before embarking on it. 

This means that investors have begun to increasingly apply non-financial factors as part of their analysis process to identify material risks and growth opportunities in their businesses. ESG investing has proven to be the favorite of investors worldwide in the wake of this pandemic and that is a huge silver lining in this crisis. Back in 2018, ESG investments were valued at about $20 trillion or about a quarter of the market but currently, its value is set to exceed $30 trillion.

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Photo: Markus Spiske.

In fact, by May this year, ESG investments surged to the highest in record with a global inflow of over US$45.7 billion. For you to appreciate how amazing this development is, consider that the overall investment market had outflows of $384.7 billion. The highest ESG inflow so far this year was recorded in Europe with $33.14 billion, while in the United States, the record is about $10.5 billion.

Now as with all things in modern-day living, there are concerns in certain quarters that the unprecedented growth in ESG investments this year is unsustainable and is only the result of the bullish stance of the global market during this period. Still, if anything, there are even greater indications that this development may be here to stay and I subscribe to this latter view. You see, the biggest obstacle to the mainstream growth of ESG investment all these years has been the indefeasibility of the status quo. There were lots more profitable non-ESG oriented companies such as those in the fossil fuels industry, but the pandemic has literally upturned the status quo.

The result of this was that with consumer interest in sustainability growing during this pandemic, finance and investment companies had no choice but to realign their policies around this new normal. For instance, Blackrock, the world’s largest asset manager has come to understand that sustainability is fundamentally reshaping the world of finance and has currently adopted sustainability to be at the center of its investment ethos. According to a report by the company, ESG insights help investors uncover more resilient companies because there is a relationship between sustainability and factors such as the ability to withstand economic and social downturns. 

ESG investments are quite nascent in the capital market and its origins can be traced back to the year 2004. The UN Secretary General at the time, Kofi Annan, created an initiative with corporate CEOs under the auspices of the UN Global Compact and with the support of the International Finance Corporation (IFC) and the Swiss Government. The goal of this initiative was to find ways to integrate ESG into capital markets and this was further straightened with the “Who Cares Wins” report produced a year later. The report showed that embedding environmental, social and governance factors in capital markets makes good business sense, leads to more sustainable markets and better outcomes for societies.

Sustainable living and ESG investments are capitalism’s efforts at doing better and going beyond its profit only manifesto. For a little while, I harbored fears that with the loss of global revenue occasioned by this pandemic, non-ESG companies would come back with a vengeance and be even more unethical than they were before. Now, it truly seems that as far as ESG investments go, this pandemic might have changed things solidly in the right direction.

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If this current desire for investors to be ESG-oriented in their business decisions persist; the possible ramifications are bound to be truly enormous. For starters, higher inflows for ESG investments means more money for sustainable companies in the economy. This in turn means more sustainable companies and also is bound to result in a corresponding increase in sustainable solutions provided by key players in various sectors of the global economy. All this would lay the solid groundwork for an easier adoption of sustainability in the mainstream and things can only look up from there.

In addition, ESG-oriented investments would present countries with the unique opportunities to carry out climate-centered recovery plans for their economies. There has been an ongoing debate over the nature of economic recovery for world nations post-pandemic and I think the easiest way to make whole countries adopt greener policies is to make it as profitable as non-ESG investments. So if sustainable investments become our new normal, with good returns to match, companies and countries across the globe would be more invested in switching over to the practice quicker.

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This seems to be the new path going forward because according to the Swiss Banking giant UBS, “We expect increased investor focus on ESG considerations after COVID-19, with particular demand for greater corporate transparency and stakeholder accountability.” The company goes ahead to say that this is probably because of the pandemic as “…the crisis underscores the relevance of ESG considerations to company performance and investment returns, and we expect that this will continue to influence corporate and investor actions going forward.”

As I write this, Alphabet Inc. the parent company of Google sold ESG bonds worth $5.75 billion in what is so far the largest corporate bond sale dedicated to environmental, social and governance purposes. The bond is designed to fund small businesses impacted by the coronavirus as well Black entrepreneurs and clean energy and building projects. All in all, we are currently surviving a pandemic in more ways than one. We know the cost in human life if we allow millions of people to be exposed to the full fury of an unchecked and rapidly warming planet. And so it is incredibly heart-warming to see that despite the pandemic, that some are doing what they can to avert this.

We are making a much-needed turn. We are unlearning age-long toxic practices in favor of better ones. And as a result of our efforts, our communal future has begun to look more sustainable than most of us even realize.

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Cover image via Pixabay.

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