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A Week in Impact: ESG in the time of coronavirus

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

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🛢️ Oil became the latest pandemic casualty, as sinking demand pushed prices into freefall. Will low prices hinder the shift to renewables, or could social distancing be the start of oil’s structural decline?

✈️ On that note: the BBC reports that CO2 emissions and air pollution have fallen sharply as a result of the pandemic, with scientists suggesting emissions may soon hit their lowest level in over a decade.

📈 Sustainable funds survived their first test in this month’s market crash, but it's still unclear how ESG funds will fare in a sustained recession. Impact Alpha outlines four possible scenarios.

🌍 UK government officials are weighing the possibility of postponing the COP 26 climate summit, due to be held in Glasgow in November, on the back of COVID-19-related travel concerns.

ESG in the time of corona

From airline companies to the EU’s Green Deal—to say nothing of nearly 12,000 people—COVID-19’s casualties have been numerous and indiscriminate.

At first, it appeared sustainable funds were not among its victims. “For months, the ESG cynics have warned that sustainability strategies would get tested in a downturn,” writes the FT. It’s a test they’ve survived, with ESG funds not only outperforming but also withstanding the market sell-off better than their peers.

There’s no guarantee that resilience will continue, however. A pandemic-induced recession will be the ultimate litmus test for sustainable investments and investors, as well as for all the executives who espouse purpose beyond profit in their press releases.

ImpactAlpha puts forward four potential scenarios for sustainable investing. While these “may play out differently in different parts of the world,” globalisation means local actions and consequences are likely to have global resonance. The first two are perhaps the most straightforward: the death of ESG, as business leaders wrench back control from shareholders (arguably in the interest of corporate survival); or business as usual—plausible if the pandemic is brought under control and feasible because ESG has been co-opted into mainstream investing.

The second two are more interesting: one step forward, as the private sector steps up in the vacuum left by governments, or “reimagining capitalism completely.”

What’s it going to be?

It’ll take a long time—and plenty of soul-searching within the finance industry—before we know whether the latter is possible. But so far, there have been plenty of signals that corporations are taking ‘one step forward’.

As per the FT: “Are companies sticking to their lofty rhetoric as the coronavirus pandemic seizes up the gears of global capitalism? Despite the expectations of ESG sceptics, the answer seems to be a cautious “yes” for many companies and investors — thus far.” Across the board, companies have handled a very human crisis with positive human capital management.

A bull-market phenomenon, ESG has been subject to one crucial question in the last ten years: namely, could it survive a recession? Will investors and executives care about social and environmental outcomes when faced with an existential threat such as the current pandemic? What matters more, profit or purpose?

Perhaps global sentiment—shared by consumers and investment behemoths alike—has moved the conversation beyond such questions. At least so far, corporate actions in the face of COVID-19 suggest it’s no longer an either/or scenario.