John Khoo recaps a momentous year for ESG trends in the face of record inflows into sustainability-inclined funds, identifying which factors are temporary and others which are here to stay post-pandemic.
One of the most tumultuous years in finance began with a sudden bear market in March 2020, before recovering back to pre-Covid market levels against the backdrop of a global economic crisis not seen since the Great Depression. ESG funds in particular have shown to be one of the biggest gainers in this recovery, with $21 billion USD of inflows in the first half of 2020, nearly equalling 2019’s total amount. This pandemic could well have been the clearest demonstration of sustainable investing’s resilience yet.
With this in mind, it is important to understand which pre-Covid ESG trends have been accelerated by the pandemic. In addition, changing personal and professional habits have brought about temporary and permanent shifts in societal and environmental trends.
Societal changes
A dramatic shift in consumer behaviour forms the base for the booms and busts of 2020. We can take the airline industry for example, which literally ground to a halt with aviation authorities banning flights to curb the spread of Covid-19. In contrast, mandatory work-from-home requirements implemented globally became the catalysts for the upturn of web-conferencing apps such as Zoom, which saw its market capitalisation grow from $26 billion USD to $150 billion USD in the span of just 7 months.
These changes in consumer behaviour, born out of necessity overnight, have led to increased digital adoption from food delivery apps to remote learning, blurring the lines between work and personal life. In particular, the dawn of cashless payments has shifted much closer in 2020, with cash usage in the UK dropping by 40%. Now no longer limited to millennials, mainstream digital adoption in payments, healthcare and education is expected to stick post-pandemic. Other new personal habits include healthy eating, fitness (with the number of fitness apps having increased by 25% in 2020) and increased hygiene practices. Value-based purchasing on the other hand is the predominant temporary change in consumption behaviour arising from the Covid-19 pandemic, with consumers neglecting brand loyalty in the pursuit of exploring cheaper brands or supporting local producers.
Most worrying however, would be the long-term effects on social inequality stemming from the economic crisis. Research by the Institute For Fiscal Studies indicates that 80% of people in the 10th percentile of earnings distributions were working in sectors forced to shut down as compared to just 25% in the 90th percentile. Worsening this is the fact that 30% of these low-income workers are unable to support their households for a month without an income. And in spite of the numerous stimulus packages being rolled out, the UK government’s capacity to prevent further households from falling below the poverty line is limited by record levels of government debt.
Transformations in Corporate Governance
These concerning levels of societal inequality will also spark longstanding adjustments in corporate governance, particularly in a company board’s emphasis on corporate responsibility. Take employee wellbeing reporting for instance: with stakeholders (in this case employees) bearing the brunt of the pandemic with longer working hours and pay-cuts, senior leaders have deemed the health and safety of their workers to be their cardinal responsibility. Regular wellbeing reports to the board have become commonplace, and this practice is expected to continue even once the pandemic ends. Moreover, companies may have to defend their traditional “pay-for-performance” executive compensation system which critics cite as unfair to rank-and-file employees. Lastly, corporate leadership opportunities skewed in favour of white men might also be further called into question.
The pandemic’s sudden arrival has proven the importance of robust oversight to deal with black swan events such as Covid-19. Risk management systems are expected to be overhauled to take societal forces into account when undertaking strategic planning and resource allocation.
Good news for the environment
While reduced consumption has impacted industries severely, the environment has been granted a much-needed reprieve from rising carbon emissions. Scientists have estimated that annual carbon emissions have dropped by more than 5% in 2020, which shows the largest decline since World War 2. Notable contributions to this figure include reduced business air travel and daily commuting to the office, which McKinsey estimates could reduce global oil demand by 2 million barrels daily by 2035 should teleconferencing become integral, shifting peak oil demand forward by as much as 5 years and consequently accelerating the future of green energy.
This pandemic therefore serves as a prime opportunity for governments to reset their climate goals. The 2008 financial crisis for instance saw the US introduce the Recovery Act which dramatically lowered the cost of solar PV and battery production. Firms would be incentivised to reset their supply-chain goals into becoming more environmentally friendly should the Biden administration set new climate goals. Detriments to this optimism include arguments that climate change is one of the last priorities on governments’ agendas, as the economic slowdown has slowed down numerous government-funded green projects. In fact, developing nations have hastened fossil fuel production to stimulate economic growth with China’s National Energy Administration commissioning coal-fired units throughout 2020.
Riding the wave
With record levels of ESG investing, the COVID-19 pandemic has accelerated numerous social and environmental trends caused by dramatic changes in consumer behaviour. These seemingly disparate ESG issues from income inequality to carbon emissions have to be monitored, as social and climate stability determine the overall health of an economy, which in turn affects the stock market. ESG factors will remain relevant and continue to play a big role in supporting the big bull market of 2020 rolling into 2021.
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