Despite claims that sustainable investing was a luxury supported by a ten-year-long bull run, evidence suggests that the green evolution in finance has been resilient throughout the coronavirus crisis and represents a secular change. Over the past few months we have seen record flows into ESG products across the globe and a burst of ‘green’ and ‘blue’ capital markets activity. In his latest report, The sustainability of sustainability: green finance during the pandemic’, Mitch Reznick, Head of Research and Sustainable Fixed Income, International at Federated Hermes, explains why sustainability is far more than a passing trend.
The sustainability of sustainability
The rise of ESG investing has long been dismissed by critics as a consequence of the longest bull run in history; a mere nice-to-have as opposed to a necessity. However, if that were true, we would have expected this wave to break in the first quarter of 2020. Yet green activity across asset classes has continued to grow, and there is evidence of this in all corners of the investment world. For example, we have seen companies like Barclays and Total commit to becoming net zero companies by 2050, ESG indexes outperforming the broader market and continued growth in sustainable-themed bonds during Q1, despite the significant disruption experienced by capital markets.
The pandemic has brought ESG and sustainability issues to the fore and a strategic priority for many companies that want to outlive the upheaval. This is something that we expect to endure through the current pandemic and into the future.
Sustainable investing: driving a green recovery
The coronavirus pandemic has also resulted in a paradigm shift for responsible-investment strategies – many of which outperformed during the crisis. Up until the sell-off in March, responsible portfolios were often used as a risk-mitigation tool: investors incorporated ESG factors with the view that it would help them avoid companies that destroy shareholder value.
But the pandemic has ushered in a heightened sense of social awareness. Policy makers, companies – and indeed society as a whole – now realise there is a need to build resilience in healthcare, food and water security, as well as across supply chains. Moreover, the crisis has also put climate change and workers’ rights under the spotlight.
This shift in consciousness can be seen when looking at sustainable fund launches. Despite the volatility experienced during the first quarter, about 100 sustainable funds were launched throughout the world in Q1 2020, up from just over 80 in the same period a year earlier (see figure 1).
Figure 1. Holding up: global sustainable fund launches
We have seen a similar phenomenon in the fixed-income universe. The Climate Bonds Initiative estimates that at least $49bn-worth of US green bonds will be sold this year, up from less than $1bn in 2013. And during the first quarter, issuance of sustainability-tagged bonds grew by 70% year-on-year.
Figure 2. Bounding ahead: sustainable bond issuance
A call to action: driving long-term thinking
The rise in green capital-market activity over the last six months has been nothing short of astonishing – and all the more so given that policymakers, companies, investors and individuals have been blindsided by the wide-reaching impact of the coronavirus pandemic.
Yet it seems that the exogenous shock of the virus has prompted a rethink – and a realisation that there is an urgent need to prepare and protect against future global threats. During these turbulent times, a focus on good ESG behaviours is more important than and can help highlight the changes that we need to make to create a more equitable, sustainable society.