The coronavirus pandemic’s impact on economic activity has resulted in record unemployment rates which are set to worsen. Boris Johnson’s advisers have touted the figure of 3,000,000, which is a scary number, but regardless of the exact figure this is a stark warning that the real effects of the pandemic are yet to be truly felt. While people bask in record temperatures and congregate en mass it’s worthwhile remembering that we are still far from being out of the woods either regarding the pandemic, or indeed the economy. The pandemic is also pushing more and more companies in challenged sectors to take advantage of government-backed support, which will in turn have an impact somewhere along the line.
The IMF is predicting a 10.2% fall to the UK’s GDP this year as a result of the pandemic.
But it’s not all doom and gloom if we look to other more socially and environmentally friendly areas of business. Global energy demand has plunged during lockdown, meaning we will emit 4-8% less carbon into the atmosphere this year compared to last, the largest fall seen in history. However, climate models and emissions scenarios show we need even more, a 7.5% annual reduction, to keep climate warming to 1.5 degrees Celsius. This would help prevent the most devastating impacts of climate change.
A moment for change
At a global level, there is an opportunity to align the economic packages announced around the world with a transition to a more sustainable society. There is a huge sea change within our industry as investors and managers align themselves in this thinking. These seismic changes ideally will move unsustainable companies to a ‘wise transition’ – ensuring employment opportunities remain a core focus, while also implementing real changes to business models to meet the wider sustainable goals we are beginning to set ourselves as a global nation. The economic recovery plans being brought in by central governments in the UK, US, Europe and the rest of the world could provide incentives for those companies involved in sustainable economic activities.
For example, you may have read about the European Union’s proposed €750 billion funding to help the bloc recover from the coronavirus crisis. A quarter of spending has been earmarked for climate action and a ‘do no harm’ clause rules out environmentally damaging investments. The EU’s New Green Deal should see more capital investment flowing into green infrastructure and re-skilling programmes to benefit climate-positive businesses. The package still needs to be approved by the EU’s member states, but it would promote ‘green conditions’, which have been largely missing in most bailouts so far. Another example is Canada becoming the first country to make corporate bailouts conditional. Canadian firms must file TCFD (Task Force on Climate-related Financial Disclosures) reports to receive bailout funds.
Particular attention has been put on one of the most hard-hit and emissions-intense group of companies – airlines. France has been a leader in re-thinking the problem systematically. One of the conditions imposed on Air France in exchange for a financial aid package, was to stop competing with rail on many in-land routes – ultimately cutting out many of the airline’s short haul flights, which seems a logical step towards reducing carbon emissions. This could be a very positive change for the UK as well, if only our rail networks were reliable!
The impact overseas
It is not all good news, however, as Donald Trump and the US government have opposed any calls to ‘build back better’ and it is likely that the financial bailouts will be extended to struggling businesses in the shale oil and gas sector, without any attached conditions.
We are often asked: if I invest for a positive impact on society and the environment, does this come at the expense of performance? The latest results from our independent research during the pandemic are showing the opposite to be true. Indeed, there is much evidence that investing in this way can boost company profitability and your long-term investment returns. A fast growing number of companies globally are working towards improving the impact of their everyday operations in relation to relevant environmental, social and governance (ESG) factors. These companies are gaining competitive advantages by improving efficiencies, reducing their exposure to legislative and environmental risks, upping their reputation and improving their employees’ work ethics. All of these improvements reflect good management – and drive profitability.
One such example is Unilever, the transnational consumer goods company with well-known brands like Lipton and Dove. They launched their Sustainable Living Plan in 2010, an ambitious roadmap to decouple Unilever’s future growth from the environmental footprint of their operations, while increasing their positive social impact. With profits up 40% since then, Unilever has taken advantage of its stringent approach to sustainability to strengthen the appeal of its products. A recent study by MSCI has provided further evidence for this on a large scale, by demonstrating a strong positive relationship between companies’ ESG performance and profitability.
ESG investing, broadly speaking, aims to invest in companies with high environmental, social and governance (ESG) performance and avoid those that have more unsustainable business operations. Through doing so, investors are effectively decreasing the downside risks of their investments but also capturing possible financial growth opportunities perpetuated through positive public sentiment. Through investing in better-run companies, investors are also less exposed to potential scandals.
Even our very own Bank of England is urging investors to realise that one key ESG issue, climate change, is posing a material physical liability and transition risks to investments. We think this highlights why an ESG investment strategy is increasingly becoming mainstream, to help investors enhance risk-adjusted returns in the transition to a low-carbon economy. No wonder a recent survey by RBC showed that 84% of institutional investors now incorporate ESG analysis into their process. This is an industrial revolution, or an industrial evolution. Or as Al Gore puts it: ‘sustainability is history’s biggest investment opportunity’.
The UN estimates that $5-7 trillion of investment is needed annually to solve the 17 most pressing global issues (represented by the UN’s Sustainable Development Goals) by 2030. In response, the number of companies providing solutions is accelerating at a rapid rate, which in turn is expanding the impact investment universe. As these businesses naturally focus on solving issues with a long-term impact potential, this is reflected in their long-term financial performance and growth potential.