The COVID-19 pandemic and social turmoil evidenced this year in the United States and beyond has, like nothing before it, thrown into stark relief why ESG matters for investors.
Their response and that of their portfolio companies to these unprecedented and seismic events may well define the next generation of investing. What are institutions now doing to address these challenges and how is the ESG data, ratings, and research industry responding to meet those needs? And how will institutions cater to the burgeoning millennial and other important demographics whose views are now being forged in the crucible of the events of 2020? This Q&A with Marija Kramer, Head of ISS ESG, the responsible investment arm of investment adviser Institutional Shareholder Services, will explore these and other pressing questions.
What in your estimation is proof that the COVID-19 pandemic has accelerated the shift toward ESG?
Pundits early in the pandemic predicted one of its consequences would be a greater focus by investors on company fundamentals to the detriment of ESG and other extra-financial considerations. In fact, the opposite has transpired. Anecdotally, we’ve had numerous conversations with clients and other stakeholders asking how they can further integrate ESG considerations into their current investment-decision making processes. They want to ensure their portfolios are weighted toward companies with a long-term focus and are proving more capable of weathering this storm than peers managing quarter-to-quarter. Empirically, our analysts have highlighted ESG outperformance since the pandemic and, finally, we have seen a record 18 majority votes on environmental and social shareholder proposals during the U.S. annual meeting season, compared with the previous high-water mark of 12 in calendar 2019. Collectively, this represents to me clear evidence that ESG is gaining greater currency as a result of the pandemic.
How will the pandemic affect corporate disclosures if, as you note, their shareholder will be focused more sharply on ESG?
Many across the industry have been waiting for movement or some inkling of progress from regulatory bodies on the need to mandate and harmonize corporate ESG disclosures. It’s no doubt tricky; the “E” is far more critical for certain sectors while the “S” is for others. But getting back to the pandemic, what we have seen is what I would argue was unprecedented nimbleness on the part of regulators to issue guidance relative to COVID-19 on matters ranging from liquidity disclosures to employee health and safety. This same level of responsiveness can translate into accelerated action by regulatory bodies on ESG disclosures if the will is there. And as ESG grows in importance, that will arrive sooner rather than later.
Social unrest in the U.S. and beyond has changed the calculus for some mainstream investment fund complexes. How are investors now seeing the issue of race and how will those changing views affect their investment decisions in the months and years to come?
Institutional investors are as conscious of what is happening on the streets of major U.S. cities as any other group. Much as we have seen in recent years investors focus on board gender and skills diversity, I predict we will similarly see them step into this area to help fill the regulatory void and appeal to a younger and more socially conscious demographic. I expect ratings, research, and data providers will step in to fill the current void for insight in this area, including through relevant indices and screens for passive and active investors alike. Here, I would like to see ISS ESG lead the way and expect it will.
What are you seeing and hearing from clients with regard to their need for data and analytics as it pertains to climate and how has this changed pre-pandemic compared with today?
The world is getting a crash course in systemic thinking and what it means for a systemic crisis to unfold globally. Investors are very aware that climate change challenges have very similar characteristics to COVID, namely that science is clearly predicting it as a central risk in the future; the inability to self-isolate as it spans the globe and the delay between our actions and when risks materialize. Throughout the coronavirus crisis, we have seen a strong continued interest in the topic of climate, and I think a better understanding of how to think about crisis situations and fat-tail events, i.e. shocks that have low probability but high impact, will influence thinking for years to come. My impression is that the silver lining COVID provided investors is the evidence that when a threat is imminent enough, stakeholders—including investors—can directly make an impact.
How likely is it that the COVID-spurred reduced use of fossil fuels will have a lasting impact on efforts to combat climate change?
The pandemic has indeed led to a reduction of emissions; according to initial studies, emissions were down 8.6 percent in the first four months of the year compared with 2019 levels. Short-term, that is great. But at the same time, it shows us that the link between economic activity and emissions continues to be highly relevant and which ultimately needs to be broken by decoupling economic growth from emissions. Climate change is a long-term challenge and, in the larger scheme of things, one year of low emissions will not make a material difference. However, institutional investors can use the current situation to help effect change with portfolio companies and, by extension, alter the underlying structure of the economy. What will be key as we look ahead is therefore to ensure green recovery plans.
What in your view is notable about sustainable bonds on the heels of COVID-19?
There has indeed been market interest in sustainable bonds in the context of the coronavirus crisis and sustainable bonds have yet again shown that they can adapt to an emerging challenge at hand. The biggest shift in the context of COVID-19 is that social bonds (dubbed COVID-19 bonds and issued to, for example, support employment and medical infrastructure) have gained prominence. What will be interesting to see in the future is to which extent green bonds will be used as an instrument to finance a green recovery.