This may suggest investors have been placing their chips on companies that demonstrate strong ESG awareness, as that characteristic often signifies a company’s ability to be forward-looking and strategic-minded when assessing different scenarios material to their business.
An agility to adapt at times of crisis also implies good governance practices which allow optimal resource utilisation, as well as better technical and digital capabilities to maintain business as usual. Investors are scrutinising companies’ response to COVID-19 and will reward companies that show strong resilience and prioritise quality ESG commitments, while shunning those that create negative impacts and risk quality growth for short-term profit.
Climate change remains the weathervane
Climate change is likely to dominate the ESG arena for years to come as governments around the world introduce more climate-related regulations. Recognising the important role of investors in driving climate action, major financial institutions have also made shifts towards ESG strategies. Goldman Sachs, for example, has announced to stop financing Arctic oil drilling while BlackRock has made a pledge to Climate Action 100+.
Furthermore, climate disclosure systems including the CDP are increasingly being adopted to help companies manage their environmental impacts, with some jurisdictions also requiring mandatory disclosures like the Task Force on Climate-related Financial Disclosures and the Stock Exchange of Hong Kong’s ESG Reporting Guide. To help generate better alignment and comparability of ESG and financial data for investors to benchmark sustainable business practice, focus is growing on the harmonisation of international sustainability standards and frameworks such as the one being developed by the International Financial Reporting Standards (IFRS) Foundation. Corporate climate action benchmarks including the Transition Pathway Initiative are being set in place to support companies in accelerating their transition to a low-carbon economy.
Meanwhile, as lucrative opportunities are emerging in the climate solutions market, an MSCI study suggests climate change innovation in the coming years may be driven by larger and more established players with bigger research and development budgets rather than start-ups. Investors will need to utilise alternative data to spot these companies that are plotting to take the lead in driving climate solutions.
Millennial investors drive change
While ESG investing is a multi-generational conversation, younger generation investors including the millennials are the driving forces for sustainable finance, according to a 2019 Morgan Stanley Institute for Sustainable Investing survey which found that a staggering 95% of millennials were interested in sustainable investing.
Threats like climate change and COVID-19 do not respect borders and remind us that businesses need to be part of something bigger. With millennials accounting for about a quarter of the global population and a massive, multi-trillion-dollar intergenerational wealth transfer going on from baby boomers to their more ESG-minded children, money is increasingly being channelled toward companies that are good global citizens that prioritise integrity-based business ethics and hold strong track records for delivering consistent business growth through reliable governance.
Rise of stakeholder capitalism
Businesses are increasingly declaring that they are committed to serving interests beyond those of their shareholders. This is because customers, suppliers, employees, investors, and communities are exerting greater pressure on companies through their consumption choices and preferences for the kind of companies they want to be associated with.
Companies that have strong ESG practices that benefit all stakeholders are generally less susceptible to lawsuits, labour disputes, or major environmental incidents that could harm their reputation and economic results. For this reason, investors should increasingly focus on social metrics and look into companies that expand ESG monitoring to the supply chain level.