Will the Coronavirus Impact Commitments to ESG?

Environmental, Social, and Governance (ESG) topics have made prominent headlines for the last decade, with themes ranging from ESG's impact on investment returns, to its influence on corporate policy and decision-making. Lately, we've read a number of articles that question the staying power of these initiatives as businesses grapple to cope with the economic fallout from the Coronavirus. Here's our take.

May 11, 2020

Critical mass from the investor community has been reached

Global assets under management in ESG ETFs continue to rise, recording net inflows of $10 billion in February and March of this year in the face of a broader market sell-off. Goldman Sachs reported similar growth in its sustainability-focused ETFs, on top of an already impressive 2019. In the firm's annual sustainability report, Goldman noted its total ESG AUM at the end of 2019 was $74 billion - an increase over the previous year of more than 4x. The firm also underlined its commitment to deploying $750 billion in sustainable financing, investing, and advisory activity by 2030.

Underlying this trend, Larry Fink's January 2020 letter to CEOs highlights the long-term importance of ESG and emphasizes the way investors will hold companies accountable for inaction. Fink believes we are on the "edge of a fundamental reshaping of finance" and the associated reallocation of capital will place climate risk at the forefront of investment decisions. His follow-up letter, written in the midst of the global pandemic, emphasizes this approach and underlines the ways BlackRock is continuing to incorporate analytics and increase transparency to its investors.

Policy makers drive change at the local level

Absent a cohesive federal energy policy, cities and states are taking big steps toward reducing their impact on climate change. Houston recently joined the list of more than 100 cities and 14 states that have committed to achieving carbon neutrality by 2050 by pledging to source 100% of its energy needs from renewable energy. Virginia signed its clean energy ambitions into law, leading its largest utility to quadruple targets for sourcing new energy generation from solar, wind, and battery storage.

It is moves like these that have laid the groundwork for real investment to be made in areas that support ESG initiatives like GHG reduction and carbon neutrality.

Corporates are procuring record amounts of renewable energy

2019 was the biggest year for corporate renewable power procurement and the pace hasn’t slowed down in 2020. Climate change is the number one ESG issue for investors, leading corporates to continue making commitments that reduce their impact. Nearly half of Fortune 500 companies have made public long-term renewable energy or greenhouse gas reduction commitments. Groups like the RE100 are leading the way, with members committing to source 100% renewable electricity in the shortest possible timeline (234 large Corporates have made the 100% commitment at the time of this writing).

While its early days to put too much weight behind relative market performance of ESG-focused funds and companies, Morningstar reported that for the first three months of 2020, 70% of sustainable equity funds had returns in the top half of their peer group. Some are making the case that this out-performance isn’t strictly based on ESG metrics and investment criteria, rather it’s because companies with the foresight to proactively address corporate policy and mitigate long-term risks to their businesses are better managed companies more broadly. Either way, ESG is making a positive impact.

This confluence of investor sentiment, public policy, and the falling costs of renewable energy supports corporate ESG and sustainability initiatives. Tech companies are making tremendous strides toward a carbon neutral future and we see more and more C&I's join the cause on a weekly basis. While conventional wisdom might lead one to believe ESG considerations take a back seat during times like these, we would argue they couldn’t be more important.

"Long-term thinking has never been more critical than it is today. Companies and investors with a strong sense of purpose and a long-term approach will be better able to navigate this crisis and its aftermath." - Larry Fink’s March 29, 2020 Letter to Shareholders