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ESG involves researching and factoring in Environmental, Social and Governance issues, in addition to the usual financials, when evaluating potential stocks. Due to the novel coronavirus pandemic and rising concern for the effects of climate change, socially responsible and sustainable investing has been on the rise. In the third quarter of 2020, $81 billion went towards the global sustainable fund network (Source: Morningstar).
So where does this leave ESG investing in 2021? We believe that COVID-19 has accelerated the adoption of ESG investing as the new normal. Here are three key shifts that we predict for 2021 and beyond, which further underscore why ESG is emerging as the new normal.
1. The ESG market will continue to grow.
We believe that businesses who methodically prioritize their ESG footprint and operations will increase value among investors. Building on this, Bank of America recently projected that the money in ESG investing could rise to between $15 and $20 trillion over the next two decades, which is equivalent to the size of the S&P 500 today. This could be attributed to a few factors: growing eco-consciousness among consumers, corporate America being held accountable to their ESG performance, and changing demographics.
2. ESG reporting will be a necessity - not a choice.
In our latest report, ESG Data, Impact Criteria and Measurement, we note that an increasing number of regulatory bodies are embracing ESG, and making ESG reporting mandatory for businesses and investors. The next decade might see ESG reporting becoming a necessity, rather than a choice. Ultimately, ESG data holds answers to many of the non-financial risks that affect an investment’s performance.
3. Growing advocacy for a global, mandated, and auditable ESG reporting framework.
ESG data has proven to be a bottleneck for many investors due to data issues relating to quality, comparability, validity, and more. A positive development in this space, the Organisation for Economic Co-operation and Development (OECD) has noted that “ESG scoring and reporting has the potential to unlock a significant amount of information on the management and resilience of companies, but it will require agreed global data standards and regulations.”
Ultimately, we believe that sustainable businesses that improve their communities and the environment are - and will continue to be - in high demand. Collective pursuit for better transparency will help investors leverage ESG to drive positive change where it matters.
It’s become very easy for companies to merely associate with causes. Whether it’s posting a black square on Instagram in support of Black Lives Matter or creating a branded hashtag in support of climate change, cause marketing - the idea of supporting a cause - doesn’t necessarily suggest impactful activism, which is more about actively contributing to positive outcomes. Ultimately, businesses often talk ‘purpose’ without following through with action, and this is labeled as “impact washing,” “greenwashing,” or “slacktivism.”
The cost and backlash of ‘purpose hypocrisy’ are greatest to those who fail to acknowledge it. Today’s consumers are paying more attention to how brands respond in times of crisis. 46% of consumers report paying more attention to brand communications than they did pre-COVID. And silence comes with a price: 56% of consumers say they have no respect for businesses that remain silent on important issues (Edelman Trust Barometer).
This begs the question, “How can investors assess which investments are impactful enough?” In our latest whitepaper, we discuss the power of transparency to mitigate the possibility of “impact washing.’ The following four factors are key in helping investors decide whether their public equity investments are impactful enough:
- Intentionality: Frame the problem that you are solving for and demonstrate an intention to generate positive social or environmental impact through investments.
- Additionality: Seek to produce beneficial social or environmental outcomes that would not occur if not for the investment. Be consistent - and don’t capitalize on ‘moments in time’ - to demonstrate ongoing value.
- Active ownership: Engage with investee companies to improve ESG or impact-related disclosures, mitigate negative impact, and drive positive impact in communities through activism.
- Impact measurement: Commit to measuring progress and report regularly on social and environmental performance of impact investments.
The opportunity is bigger now than ever before, particularly as people look to businesses to create positive change. However, it is equally important that companies take action on the issues that they stand for, as opposed to the slacktivism of proclaiming mere association. The world is waking up to hypocrisy by calling out such companies and investors who claim purpose, but lack action. So, as investors, it’s important to signal the difference between trust and transparency.