Covid-19 Won’t Derail Sustainability Momentum

posted by Marsha Vande Berg on March 29, 2020 - 12:00am

The microscopic pathogen that is threatening global health and wreaking havoc from Singapore to Seoul, Tokyo to New York and Berlin to Milan is clearly reshaping the 2020 global outlook. But it should not derail the current momentum driving sustainability investing and corporate governance. 

Covid-19’s deadly tentacles already have contributed to the deaths of thousands – and the number is still climbing. Economists, meanwhile, estimate that the coronavirus will trigger a global contraction, hitting the developed economies and notably the United States and Europe the hardest. The only major economies with GDPs projected by the Economist Intelligence Unit (EIU) to escape negative territory this year are China, India and Indonesia, though GDP 2020 is forecast to fall off substantially from their respective forecasts pre-virus.

The impact is but a slice of Covid-19’s deadly consequences. There are also disruptions to daily life and community together with a deepening uncertainty about what will happen next absent an effective vaccine that is available in sufficient quantities for everyone. Aggravating current circumstances is what we do now know – painfully – and that is our healthcare infrastructure is woefully inadequate when it comes to matching the demands of a pandemic, including in the world’s richest and largest economy, the United States. 

Because this crisis is exposing the sheer inadequacy of our 21st century health care system and with it, in some instances, a brazen failure of political leadership, it is imperative that the tenets of sustainable investment be applied to the healthcare sector. The objective can be to incentivize production of what is needed and affordable over the long term – and not what’s simply profitable. 

Pension and sovereign funds, which are today’s vanguard in the investing mainstream are well positioned to serve as the wellspring of an emphasis on inadequate healthcare infrastructure as a long-term risk. It can be seen as yet another big picture externality in the category of climate change and the environment, social issues, including the interests of stakeholders that range from a company’s human capital to the supply chains it depends on, to the communities where it does business. The quality of governance that oversees corporate strategies is likewise critical.

In addition to the environment, social issues and governance, ESG risk factors could explicitly reference healthcare and in the process, position society to be better prepared the next time we face a pandemic’s known unknowns. It also represents an extension of the stewardship responsibilities of fiduciaries at the institutional investor level as well as in the C-suite and the corporate boardroom. 

The world’s largest pension and sovereign funds already are among the leaders who are driving the integration of external ESG risk factors in their investment due diligence as well as in investing sustainably outright. They are applying these risk mitigation and opportunity strategies to both corporate equity and debt; to traded securities as well as private investments. 

“The markets are rewarding companies with sustainable business practices,” Jeffrey Jaensubhakij, group chief investment officer of GIC, is quoted as telling the World Federation of Exchanges general assembly in October 2019. Companies with strong ESG scores, fare better because their cost of capital is lower. 

Like GIC, Singapore’s Temasek Group actively engages on behalf of sustainability, reviewing prospective investments first for the social and environmental impact and then based on their financial fundamentals. The fund’s commitment to reducing their portfolio’s carbon footprint also places the fund in the ranks of institutional investors aggressively targeting climate change. These include several, but notably CalSTRS and CalPERS, both California-based pension funds – respectively, the largest for public educators and for public workers, ABP in the Netherlands and GPIF in Tokyo. 

Why do they do it? It’s as the GIC investment chief suggests. Institutional investors with sustainability goals in sight are putting their bets on companies that demonstrate the capacity to be sustainable and create shareholder value in the process. That means translating stewardship responsibilities in terms of the greater good. It also means they rank their investments as part of the bigger picture generations after them will inherit. 

This mainstream direction of institutional investment and sustainability is reflected in the results of the recently released, fifth annual survey of institutional investors by Morrow Sodali, a global strategic advisory. Their findings underscore the current emphasis of sustainable investing on environmental issues versus last year, when human capital interests topped the survey chart. 

The tally based on responses over the last 12 months from investors responsible for US$26 trillion in assets ranks climate change in first place on the ESG agenda. “It was clear that 2019 marked a turning point in incorporating ESG factors into mainstream investing,” according to the study’s summary published on Harvard Law School Forum on Corporate Governance, March 25.

As a consequence, “all companies regardless of their sector should expect to be questioned on how they are managing and responding to these risks and opportunities. Boards and companies should be prepared to face investor scrutiny on how they approach and report on their exposure to ESG related issues.” 

Among the survey’s other findings are: 

  • ESG issues are “now at the core of investors’ stewardship activities and central to their dialogue with management and with corporate directors. 
  • Investors increasingly see themselves as “active stewards of capital”, reflecting an interest in driving “effective stewardship”, not micro-managing the company. It also means they want credible detail about how a company measures the impact of climate change on its bottom line. 

Prior to the coronavirus pandemic, ESG was a cause celebre. Cheered by the World Economic Forum, prominent CEOs wrote checks to plant millions of trees, funded charity concerts and pledged to be carbon neutral in record time. Today, companies are in line for government assistance, slashing dividends and cancelling share buyback provisions. And many are simply struggling, wrote the editors of the Financial Times newsletter, Moral Money. 

What’s happening today is clearly not business as usual. But rather than allowing a tiny pathogen to cloud our vision for a sustainable future, our experience with this pandemic can catalyze greater clarity about values and the purpose of business and finance.

 “The pandemic makes it increasingly hard to hold on to the idea that the business of business is merely business,” wrote Rebecca Henderson, author of the upcoming Reimagining Capitalism in a World on Fire.