From resilience to regeneration

If the first recession since 2008 is a litmus test for the long-term viability of ESG, it looks like it might pass.

🚫 BlackRock took voting action against 53 companies on climate grounds, while urging a further 191 firms to comply with TCFD recommendations.

📑 Generation released its annual Sustainability Trends Report, which is cautiously optimistic about the direction of climate action in the wake of COVID-19.

🛍️ Standard Life Aberdeen dumped fashion retailer Boohoo following accusations of poor factory conditions. Is the crisis a wake-up call for fund managers?

🏛️ Banks need to work with the UK government to create a more sustainable and inclusive economy in the decade ahead, according to an LSE report.

📊 JP Morgan unveiled a global ESG integration policy, which mandates all funds demonstrate appropriate documentation, monitoring and research.

🌎 The B-Corp movement appears to be accelerating, with Fortune and the FT citing growing appetite in private and public markets alike.

💻 Led by PGGM and APG, a group of asset owners launched an AI-driven SDG investment platform that connects asset owners and their managers.

What investors did next

If the first recession since 2008 were a litmus test for the long-term viability of environmental, social and governance (ESG) investing, it's safe to say it passed.

In the ten years since the Global Financial Crisis, sustainable investing has crept up the investor agenda. Its rapid growth, however—which correlated with the longest bull market in history—didn't escape cynicism. Wasn't it just an exercise in PR spin? Would investor magnanimity survive the next market crash?

Scepticism still abounded in January of this year, when BlackRock put sustainability at the heart of its investment process, and then again in February, when climate change took centre stage at Davos. By March, COVID-19 had spread across the world, and the economy started to crash.

Not so ESG. Sustainable funds have shown remarkable resilience in the face of global volatility, attracting record flows and broadly outperforming their technical indicators. So far, at least, the cynics have been silenced.

In that time, others have been won over. A report from Capgemini Research Institute found the pandemic has accelerated consumer commitment to sustainable shopping. Hot on the heels of private companies, public companies are also beginning to embrace purpose, with a growing number of firms recently launching as B-Corps: businesses achieving high environmental and social standards.

Suddenly, a singular focus on shareholder returns looks outdated.

There are a number of reasons why the events of 2020 have elevated sustainability. First, it's a reminder that even the biggest economies are deeply vulnerable to environmental vicissitudes. Second, while climate change was already in the headlines, the human tragedy—particularly as the pandemic has dovetailed with Black Lives Matter—has woken up the world to the scale of addressable social and racial injustice. Rarely in the modern world has it been so obvious that environment, society and economy are inextricably linked.

But COVID-19 has uncovered resilience as well as vulnerability. As per a note issued by BlackRock in May, "regardless of industry, strong sustainability characteristics have been essential to helping companies weather the crisis." Generation Investment Management goes a step further in its annual Sustainability Trends Report, concluding that, "for many organisations, the lesson from recent months is that sustainability and resilience are two sides of the same coin."

It's not enough that companies simply survive, however. As concludes the Sustainability Trends Report, the "redefining of what is possible must now be taken into other shared challenges for our societies, not least for climate." A recent report from the Grantham Research Institute concurs: "At the heart of the recovery... should be the convergence of two imperatives: the creation of a successful net-zero-emission economy and 'levelling up' economic and social prospects."

Companies will play a critical role in the transition to a more inclusive and sustainable economy. So will their investors.

As Ronald Cohen put it in the FT yesterday, "COVID-19 has opened the door to the urgent change our times demand: to bring impact to the centre of our economic system, to overthrow the tyranny of profit and to shift the basis for our business and investment decisions from risk-return to risk-return-impact."

Here's hoping we seize the opportunity.

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