In recent years, Environmental, Social, and Governance (ESG) investing has been gaining traction—but the field got propped up by an unlikely supporter this year: the global pandemic.
The COVID-19 crisis helped accelerate this trend, and ESG governance investing is gaining private and institutional attention like never before.
Once just a niche approach, sustainable and socially responsible investing present an opportunity for capital to address some of the problems COVID has created, as well as those that it has exacerbated.
2020 is quickly coming to an end (thank goodness), but where we go in the coming years will be impacted by our decisions and where we put our money now.
David Gardner, co-founder of The Motley Fool, says it best, “Think about the world that you want to create, because sure enough your dollars and mine, our capital, is helping shape the world.”
Investing in the Environment
In addition to some of the inherent benefits of ESG investing—reduced portfolio risk, competitive returns, and that tingly feeling brought on by doing something good—the ‘E’ in ESG assets has proven influential in its own right.
Climate change has presented itself as the issue that most money managers prioritize, and this year has demonstrated exactly that. In just the first half of 2020, a record $20.9 billion was funneled into sustainable funds.
Morgan Stanley reported that during the first half of the year, sustainable equity funds thrived compared to their traditional counterparts, and were better at weathering any pandemic-induced volatility.
Not only has ESG investing performed well amidst unprecedented challenges, but these challenges are also calling in the need for more investment.
Global Quarterly Sustainable Fund Inflows (Source: Morningstar)
COVID and the Importance of Social Investments
In fact, given the pandemic’s impact on people around the globe, it’s the ‘S’ that everyone is focused on now.
The pandemic has been quick to bring people to the forefront—not just the wellbeing of remote employees and the health and safety of essential workers, but anyone and everyone implicated by some of the other social issues that have been intensified in 2020.
The pandemic has demonstrated how any crisis—environmental, health, or otherwise—can have an impact on society at large.
In a world where ESG investing was nearly synonymous with “climate change investing” or “environmental investing,” the social element of ESG has been neglected in the past.
But it’s proven to be a critical component of the equation this year.
Now, human capital issues are becoming just as important as environmental and governance issues, and we’re already seeing shifts in investment.
In addition to green bonds focused on climate change, the investment world is beginning to welcome more social bonds that are focused on issues like health care, education, and affordable housing—to the tune of $142 billion in new social bonds in 2020.
The novel coronavirus pandemic has not only shown us a way forward in addressing some of the world’s most most pervasive problems, but it has also presented great opportunities for investment.
In an interview with Financial News London, Amra Balic from BlackRock said that, “When we look back at 2020, it will be remembered as a turbulent year that will leave a very big legacy. The focus on people will be one of those things that will be materially important for investors.”
Putting Money Where Your Mouth Is, Literally
When you put the ‘E’ and the ‘S’ together, you get the intersection of environmental and social investing.
What better meeting place for the two than farmland?
According to a report published this year by the Forum for Sustainable and Responsible Investing (US SIF), investments in Sustainable Natural Resources/Agriculture has seen an 81% increase since 2018, now totaling $2.38 trillion.
With COVID shedding light on (or worse, exacerbating) vulnerabilities in our global food system, ESG investments in sustainable agriculture has stepped in to be the best way to tackle issues of both an environmental and social nature.
According to the World Bank, the shock of the recent pandemic has opened up an opportunity to scale up investments that protect our environment, with actions that can also reduce poverty. Investments in sustainable agriculture are recognized to do both—and they’ll help mitigate future large-scale shocks, like the one we’re experiencing now.
With governments around the world realizing that green projects are the way of the future, they’re paving the way for an influx in investments, like what we’ve seen in 2020.
In regions like Latin America, socioeconomic disparities have intensified under the pandemic. International investment could be the way forward, helping to both mitigate the negative impacts of COVID-19 and pave the way towards a strong recovery.
In Brazil, there’s been a push from former presidents and the Banco Central do Brasil to pursue a “green recovery.” Similarly, in Colombia, ESG investing has proven to be a strong step forward. Recently, GRI and the Colombian Stock Exchange (BVC) jointly issued a guide that encouraged responsible investment practices to contribute to an economy that’s both socially fair and environmentally sustainable.
The region presents a unique market for investment, and sustainable agriculture will be a key part of that—one that has a lot of overlap between the environmental and social elements of ESG investment.
As they say, with crisis comes opportunity—and in COVID’s case, that opportunity looks like it’ll pay off from an environmental, social, and financial perspective.