A little over a year into a pandemic world plagued with fear and anxiety, sustainability investing has not lost its edge. Strategies in ESG investment have adapted to this unfamiliar landscape. Although concerns linger, trends are emerging amongst ESG investors who these investments potentially helping repair damage wrought by COVID-19.
In this article, I will examine trends emerging for each aspect of ESG investing (Environment, Social Impact, and Governance) and some of the technology employed which is strengthening the field.
“E” – Taking On the Biodiversity Crisis through Investing
Some agriculturally oriented ESG and impact investors (learn the difference between sustainable investing and impact investing) have focused on breaking down the supply chains of agricultural and food sectors; in doing so, this ESG investing trend targets the “E” of “ESG” to protect our existing resources and promote sustainable growth.
Agriculture contributes to around 80% of global deforestation, which has a significant impact on the ongoing climate crisis. The effects of deforestation affect every industry differently, but there is no industry left untouched.
Businesses and investors are now looking deep into their support or contribution to unsustainable agricultural supply chains. Some companies contribute more to the impact side of biodiversity loss. Others instead procure the agricultural resources they need through wasteful avenues, creating an untenable dependency pathway.
The beef industry in Brazil is a fitting example of this phenomenon. The beef industry in Brazil accounts for 80% of GHG emissions related to land use change. Brazil represents a key carbon sink for the planet, so the climate-based threats posed by unaltered product supply chains have powerful global implications. In 2019, a collection of 230 ESG investors with $16.2 trillion of assets under management came together calling on companies working in Brazil to address gaps in unsustainable supply chains.
One way in which ESG and impact investors have approached this issue is through investing in blockchain technology. While blockchain technology is most often associated with cryptocurrencies, it has great potential in strengthening ESG movements as well. Blockchain is a complex system which tracks information through a series of immutable mathematical verification formulas. I will elaborate on this concept in next week’s installation.
In the context of ESG initiatives, blockchain technology helps identify and streamline supply chains while protecting businesses and customers from fraud or corruption. It also serves investors by analyzing where the companies in their portfolios are receiving their supply from—helping legitimize their claims towards sustainability.
“S” – Creative Investors Tackle Social Inequities
The COVID-19 pandemic has illuminates economic and social inequalities to a palpable degree throughout 2020 and into 2021. Whereas investors traditionally targeted individual companies to create more equitable conditions, ESG investors are now seeking alternate methods.
Some have chosen to channel their money towards financing vehicles such as social bonds to create impact. In 2020, investments in social bonds grew rapidly, as exemplified by the European Union’s issuing of €17 billion in social bonds. In this way, investors are targeting the “S” (social impact) of the ESG investing trends, a notoriously elusive facet of ESG to effectively target. Today, corporations are more frequently engaging in conversations around social inequities– facilitating strategies to combat these are considered critical.
ESG investors are creating impact in this space by vigilantly checking their collective portfolios for net ESG alignment. Another strategy employed is to align a portfolio with the UN’s Sustainable Development Goals, an internationally minded framework with over 160 targets to choose from. Using this framework allows investors to target specific industries under the umbrella of global sustainability with precision and efficiency.
(Figure 1 via MCSI)
“G” – Governance: Creating a New Normal
In the post-COVID investing universe, examining Governance as a factor of interest is approached in a similar manner to the Social factors. In essence, ESG investors are looking for corporations whose corporate boards and leadership are outspoken in their dedication to sustainability and are actively building infrastructure to back it up. This can take many forms such as executive compensation disclosures or board-diversity mandates, among others.
As corporations move to take on climate change internally, the interplay between national/state governments and corporations will continue in its prominence. 2030 climate targets have been adopted by worldwide governments, demanding corporations cut their GHG emissions and to integrate sustainability into their corporate structures.
As the United States meets vaccination milestones and receives reports of lowered new COVID-19 cases, the government is predicted to take a more active stance in its attitude towards corporate compliance. This prediction is already showing itself to be true, with President Joe Biden calling 40 World leaders to a Climate Summit to take place in late April, 2021.
ESG investing is in a strong position for growth, now backed up by years of experimental data. Where in the past, corporation and investors alike saw ESG initiatives as an obstacle to work around, many now see ESG initiatives in an opportunistic light—one in which they can shape the future in an exciting and positive way.