Sponsored Is Covid-19 the ESG tipping point that markets needed?

Is Covid-19 the ESG tipping point that markets needed?

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A global pandemic, oil supply shocks, and now protests and civil demonstrations across the globe regarding social justice have moved sustainability centre stage, according to a panel of experts speaking at the ASI conference on Tuesday.

Olivia Albrecht, head of ESG business strategy at the $1.8 trillion PIMCO, sees a continued acceleration of the sustainability trend in a COVID-19 world. “It’s likely to help accelerate action among investors on long-term sustainability risks,” she told delegates.

Albrecht said the current crisis could serve as a springboard, causing more investors to look at social factors when evaluating bond issuers, which might ultimately result in more financial innovation in fixed interest.

“ESG factors are increasingly more important to funds and rating agencies alike, as they affect issuers’ cost of raising capital.”

The PIMCO executive has seen growing issuance in COVID-19 bonds, as well as social bonds, on top of a climbing green bond market.

According to Albrecht, the investor base is broadening with sovereigns, development banks, corporates and even foundations coming to the market with sizeable COVID-19 related issuances.

Importantly, there has been a slight pause in green bond issuance in March and April but there was pick-up in social bonds.  Since many companies will require capital to successfully manage social challenges – such as worker safety and treatment, flexible work practices, supply chain transparency and cyber security – Albrecht anticipates social bond issuance to rise further.

The green and social bond market have topped $240 billion USD in new issuance this year, with social bonds accounting for 20 per cent of that market, delegates heard.

Speaking on the environment, Albrecht accepts there is a potentially negative outcome from COVID- 19  – that the crisis could slow the speed of progress to a lower carbon future. That said, she noted that major players in the oil and utilities industry are still switching from coal to renewable energy and issuing more green bonds in line with the Paris Agreement.

Also, despite the drop in oil and gas prices, most companies and the strategic long-term climate pledges of countries have remained in place, she added.

“As investors we know we can help steer companies toward a more sustainable growth model but we need more institutional investors to get on board and push together in that direction, she said, adding that because of its size, PIMCO can help shape market standards.

A source of alpha

Fiona Bassett, global head of systematic investment solutions at the $700 billion USD DWS agreed with her fellow panelist. Bassett believes that COVID-19 will have “profound and everlasting” affect on the rapidly-developing ESG market.

”In our view, the pandemic is highlighting the financial reality of ESG as evidenced in investment performance,” she told delegates.

“When you look at performance differentials between ESG and non-ESG investments during COVID19, there has been a deviation in terms of positive performance from the ESG investments,” she explained.

”ESG goes to the heart of risk/return decision-making from an asset allocation process. Investors regard it as a source of both alpha and risk mitigation,” she said.

“You are starting to see the risk/reward tradeoff starting to play out.”

Like PIMCO’s Albrecht, Bassett touched on the idea that COVID-19 could hold up the pace of climate change management. She said the fall in energy and carbon prices has renewed pressure on climate-related technology leading to fewer solar and wind projects.

“It’s a nuanced picture but the regulatory thrust is very clear.”

The panel discussion then focused on how investors could use their power to fix poor corporate behaviour. The importance of collaboration was a theme raised by Liza McDonald, head of responsible Investments, at the $125 billion Aware Super.

McDonald said she spent about a quarter of her time responding to member queries on ESG – particularly as the issue of ethics and culture has been raised recently by the actions of resources giant Rio Tinto and AMP.

Aware has dropped Rio Tinto from its socially responsible investment Australian equities portfolio following that company’s destruction of 46,000-year-old Indigenous heritage sites at Juukan Gorge.

“Australian asset owners have collaborated to engage with companies so they are hearing the same consistent message in terms of accountability, getting back trust and how they are going to keep their social license to operate,” she said.

The conduct was written up by the media as reputation risk. But according to McDonald, there is a huge risk to Rio Tinto’s sustainability as well as its license to operate.

“It’s incumbent on us as owners to make sure companies are managing their ESG issues,” she said.