Environmental, social and governance (ESG) investing gained significant momentum in the latter half of the previous decade as the world recovered from the global financial crisis and began to appreciate the value of sustainable business practices.
As we begin the next decade it’s clear that some countries have fully embraced an ESG approach to investment, while others remain ambivalent, or worse, wholly reject it as a financial ethos.
The existential and economic crisis caused by the coronavirus pandemic, however, has sharpened minds when it comes to ensuring a sustainable financial recovery, and appears to have led to an acceleration in the uptake of ESG investments.
In the first half of this year net inflows into ESG funds in the US reached $21 billion, almost the same amount as was seen throughout the entirety of 2019. Some experts are suggesting that Covid-19 could be the catalyst for sustainable investing becoming the norm.
“Over the long run Covid-19 could prove to be a major turning point for ESG investing or strategies that consider a company’s environmental, social and governance performance alongside traditional financial metrics,” said Jean-Xavier Hecker and Hugo Dubourg, co-heads of ESG and sustainability within JP Morgan EMEA Equity Research earlier this year.
Until recently global progress on ESG had been patchy, admits Alistair Byrne, head of EMEA pensions and retirement strategy.
Byrne says there is a clear hierarchy when it comes to those countries doing ESG investing properly and those who have failed to embrace it.
“Scandinavia and the Benelux countries have been at the forefront of this. Their governments have really reinforced the need for ESG focus and investment and that is commonplace there. They would be the leaders from my point of view.”
What about Ireland?
Sustainable finance is a main pillar of the Ireland for Finance Strategy for the development of Ireland’s international financial services sector (IFS) to 2025; the strategy itself cites that 81 per cent of asset managers have in place a responsible investing policy.
Ireland was also one of the first European countries to issue a green bond raising €3 billion, while in 2018 we were the first country to sell off its investments in fossil fuel companies.
In September insulation-maker Kingspan Group announced it was raising €750 million from green private placement in what the company called the "largest corporate green private placement globally to date".
That same month AIB became the first Irish bank to enter the green bonds market, raising €1 billion of capital to support lending towards renewable energy projects and green buildings.
Trustees
Yet Byrne places Ireland “in the middle of the pack”, along with neighbouring UK, saying there is plenty of progress yet to be made.
“Trustees are engaging with the issues, there’s work being done, but there is still a lot to be put in place,” he says.
Worst-in-class is the US, who Byrne says is “lagging” when it comes to ESG-friendly regulation.
“The current administration has introduced some regulations that have almost discouraged trustees taking account of ESG factors. While the Europeans have been pushing schemes to take greater account, the US administration has been instead putting barriers to that, which reflects wider policies they have about energy.”
While global ESG fund assets in 2020 have almost doubled since the end of 2015, Europe enjoys the lion’s share of these, around 75 per cent, while the US accounts for just 20 per cent.
Byrne says overall there is a lot of work under way and good progress being made, and he agrees that the Covid-19 crisis will have a positive impact.
“Previously with ESG there was not as much emphasis on the ‘S’, but with the pandemic that has changed. A company’s business practices, how they supported their workforce – that’s also an important element of sustainability as well as the climate change aspect, and this crisis has brought that to the fore.”