As the world starts to look beyond crisis management and focus returns to non-coronavirus-related objectives, improved regulation could become an unexpected ESG benefit of the pandemic.
Back in 2019, all the signs were that 2020 was set to be THE year for ESG action. Our prediction was that the primary focus would remain on the ‘E’ of ESG – the environment – and climate change specifically.
Unsurprisingly, we have seen significant disruption to pre-agreed ESG plans and priorities as governments, companies, individuals and society as a whole work to respond and adapt to the new operating environment.
Has Covid-19 had a positive or negative impact on the growth of ESG investing?
While there is a danger that ESG momentum will slow as the crisis-management mentality continues to take precedent, we would argue that Covid-19 provides the perfect illustration of why we need to tackle climate change – its disruptive impacts will be world-changing if not addressed – and how quickly governments and society can act in the face of a true public emergency.
So rather than Covid-19 bringing ESG progress to a stop, we believe it should be viewed as a temporary delay, after which efforts should resume and accelerate to rebuild a world that is based on greener, more resilient and inclusive practices.
In terms of how we see the balance of emphasis going forward with regards to E, S and G, we predict focus will expand to become more balanced in terms of bringing social issues into sharper focus, illustrating the interconnectedness of people, the planet and prosperity.
What do you think will be the next major development in ESG investing?
I’d say the role of regulation in institutionalising ESG within the investment industry. To-date, it’s been broadly a voluntary uptake, dictated by supply and demand dynamics.
In recent years, we’ve witnessed increasing recognition by governments, policymakers and regulators that ESG developments like climate change can represent systematic financial risk if left unaddressed.
There is a need for speed and action on a scale not seen before if we are to make the low-carbon transition and do this in a fair and equitable way to avoid ‘dangerous’ temperate increases.
As markets do not appear to be rising to the challenge, we are seeing policy and regulatory intervention, with the European market being the frontrunners on this, but we are confident other regions will follow. While there is clearly a need to scale-up action to decouple economic development from environmental degradation and social unrest, there is a danger this is done in a way which is not effective or efficient.
It’s a tricky balance to strike – but we believe it’s critical we get the right type, and quantity, of regulation. For instance, we believe regulation needs to focus on transparency rather than being prescriptive in defining what is ESG when we know there is a spectrum of approaches. We support smart regulation which harnesses the power of capital markets as a force for good.