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Week in Impact: Can sustainability survive coronavirus?

Does BlackRock's watershed CEO letter suggest the finance industry is finally taking climate risk seriously?

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🏛️ The European Commission published its first-ever climate law: the basis of the EU’s Green Deal, which aims to make the 27-country bloc climate neutral by 2050.

🚨 The Institute for International Finance warned the sustainability agenda has been undermined by an absence of common standards or global policy framework.

📊 As flows increase into ESG funds, elevating the need for equivalent ratings, data providers are coming under scrutiny for the integrity of their scoring systems.

🌱 Taking a decisive stand against greenwashing, the SEC is considering new rules to dictate which funds can and cannot market themselves as ESG.

💸 Pension funds GPIF, Calstrs and USS united to protest short termism, arguing a focus on short-term returns exposes them to “catastrophic systemic risks.”

📈 Sustainability: a critical driver of future returns and losses but one that has not yet been properly valued by markets, according to BlackRock's latest report.

🏭 TCI founder and activist investor Chris Hohn launched a campaign to persuade central banks to starve hundreds of planned coal-fired power plants of finance.

Can sustainability survive coronavirus?

Having largely ignored the coronavirus outbreak when it was isolated to China, financial markets started responding more aggressively last week as the virus spread through the Middle East and Europe. Fears of a pandemic pushed stocks into correction territory, with risks priced so aggressively that a recession began to look, if not probable, then certainly possible. 

Whether or not coronavirus is the catalyst, there are other reasons to believe the world is heading towards an economic downturn. And, as this week proved, central banks have less ammunition to play deus ex machina. 

Of course, recessions are a natural part of the economic cycle; we’re long overdue one anyway. The current bull market, which started in 2009, is the longest in history. In 2009, I was still in school. More concerning: plenty of existing ESG fund managers were still in school. More concerning yet: ESG—the mainstream, flavour-of-the-month, $30-trillion ESG industry that we know and love—was a mere twinkle in the PRI’s eye. 

The point is, ESG (and most of the data underpinning it) has never endured a recession. 

There are plenty of reasons to believe environmentally and socially responsible companies with strong governance are more economically viable in the long run. Only last week, BlackRock put out a report in which analysts argued that the trend towards sustainability is a structural shift: one that has not been priced in by markets and that will see companies that perform well on ESG metrics rise in value. 

That might well be the case. But it rests on a pretty big assumption: that company executives and investors will stay committed to long-term, stakeholder-focused values in a falling market. 

The last decade has witnessed a massive shift in the corporate narrative, with executives increasingly expected to manage for the benefit of people and planet rather than just quarterly investor expectations. As the FT points out, however, “this rebuke to the old doctrine of shareholder-primacy has come during a long bull market [when] record profits made it easier for chief executives to think magnanimously about constituents who have no power to oust them if they miss forecasts.”

The market reaction to coronavirus is a reminder that the choice won’t always be so easy. “As stock prices whipsaw and global supply chains seize up, capitalism’s recent conversion faces its biggest test,” concludes the FT. “What companies should do is clear. What they choose to do will determine which ones emerge strongest.”

Because it’s relatively young, sustainable investing is predicated on a number of untested and hopeful hypotheses. For ESG in particular—which, unlike impact, has been positioned as having no trade-off with financial returns—there’s an assumption that it adds alpha or is uncorrelated to market movements. That’s hard to prove when it’s only really been tested in a bull market. 

Sure, it would be nice if ESG added alpha at every stage of the market cycle. And of course, we fundamentally believe that companies managed for the long-term best interests of all stakeholders are likely to outperform. 

But maybe we’re looking at sustainability with an outdated lens. 

When all decisions in the corporate and financial world are informed by a singular focus on financial returns, sustainability can only be justified for as long as it delivers profit. Present market volatility is a stark reminder that we can’t always rely on the two to run in parallel. 

If we’re serious about sustainability, perhaps it’s time for a new bottom line.