Coronavirus brings ESG investing to the fore
Despite the pandemic downturn, funds that observe environmental, social, and governance (ESG) factors have largely outperformed their benchmarks. Meanwhile, the EU and the IMF are calling for a post-pandemic "green recovery."
Since mid-February 2020, the majority of ESG funds have outperformed their benchmarks with ESG and sustainability themes attracting strong fund inflows. As reported by Morningstar, in the first quarter of 2020, global investors poured a record USD 45.76 billion into funds that invest in keeping with environmental, social, and governance practices. This compares to outflows of USD 384.7 billion across all funds.
Following a growing trend from last year, Europe continues to be a strong leader of sustainable investing – and the topic is gaining in popularity in other regions. So far this year, investors in the US have exhibited a greater appetite for sustainable investing than in previous quarters and US ESG Funds have been responsible for USD 10.45 billion, or 22.8% of all incoming cash, in the first three months of this year. That is significantly more than the same period last year, when the US was in the midst of its longest-running bull market in history.
"We've seen the market moving increasingly toward responsible investing, driven in part by a rising societal commitment to sustainability. The Coronavirus pandemic has heightened our clients' resolve to direct their investment dollars toward positive environmental and social outcomes,"
explains Marisa Drew, CEO of Credit Suisse's Impact Advisory and Finance Department (IAF).
Regulatory support and a call for a "green recovery"
Sustainability regulations are a global topic and we have seen increased guidance from regulators in all regions, with the EU planning to implement binding regulatory requirements in 2021.
Under the new EU's regulations, financial institutions will be obligated to provide transparency and suitability metrics to clients and investors regarding sustainability exposure and risks in investment products. The EU has also confirmed that green finance will be key in the post-pandemic recovery in order to stay on track with its sustainability goals.
The three key objectives of the new framework entering into force next year are
- to reorient capital flows toward sustainable investment to achieve sustainable and inclusive growth,
- to manage financial risks stemming from climate change, environmental degradation, and social issues, and
- to foster transparency and a long-term view in financial and economic activity.
Kristalina Georgieva, head of the International Monetary Fund, echoes the EU’s sentiment and backs it up with the IMF guidance on "greening the recovery." Its goals include promoting green finance and mobilizing private capital for green investments.
A post-pandemic world needs responsible investing
The coronavirus pandemic has exposed structural and fundamental weaknesses of our world and showed how many issues are globally intertwined. It also exacerbated many climate and societal challenges defined by the UN's Sustainable Development Goals framework. The virus will leave us with even greater financing gaps, which cannot be closed without engaging private capital. Bridging climate and social inequities and the associated funding gaps can be a strong incentive for purpose-driven investors and one that boosts sustainable finance and impact investing in particular.
Against a backdrop of increased regulatory support, continued market uncertainty, and better resilience of sustainable investments, the demand for sustainable investing should not waver.