The global economic and health crisis caused by the COVID-19 pandemic proved to be the impetus for a greater emphasis on sustainable investment. While chasing market returns, corporations and investors have increased their efforts to resolve environmental, social, and governance concerns. The growth of ESG consulting firms has aided in the transition to green investment, as well as confirming ESG investing.
ESG investing has also been aided by social pressures, regulatory shifts, and new management approaches. Similarly, reports that ESG stocks have managed to outperform the broader stock market and are expected to emerge even stronger from the pandemic support the idea that ESG investment will become the new standard post-COVID-19.
Similarly, it’s becoming evident that a variety of factors play a key role in defining ESG as the new norm.
Social Pressures
Gone are the days when only governments were responsible for solving societal and environmental problems. Companies and investors play an increasingly important role in resolving ESG concerns through investment in the modern investment period.
Swirling societal forces are already changing the ESG system, pushing investment managers to think outside the box while making critical investment decisions. Investors are also putting pressure on managers to make investments that guarantee market returns while also addressing underlying ESG concerns.
Many businesses are being forced to reconsider their activities and goods in order to concentrate on environmental preservation and supporting the human race as a result of increased consumer awareness.
“Policymakers and investors are increasingly agreeing that companies and corporations must become part of the solution in addressing ESG issues beyond compliance with laws and regulations,” says Ekaterina Chernova, Managing Partner of The Altruist League.
After COVID, the recognition that investments can have an effect on ESG issues rather than only chasing market returns can propel ESG to new heights.
Regulatory Changes
New regulations are being enacted by governments all over the world to help spur ESG
development. The UN has been at the forefront of policy initiatives to improve environmental stewardship, social responsibility, and economic growth.
One such regulatory reform that has aided ESG’s success is the 2015 Paris Agreement, which calls for a greater emphasis on reducing carbon emissions. The European Union has been at the forefront of introducing new legislation aimed at establishing a reliable system for environmental classification.
New rules and regulations aimed at reducing carbon emissions have also aided the growth of certain sectors, such as the renewable energy industry. Similarly, hedge funds specialising in ESG investing in renewable energy have emerged, further popularising ESG investing.
Companies and investors should continue to be influenced by regulatory changes in how they spend their capital. Since ESG investments are subject to some of the least stringent regulatory scrutiny, they should continue to draw more capital after COVID-19.
Investors’ Expectations
A new trend calling for more interaction between investors and companies is gaining traction. Increased investor interaction with management has resulted in the majority of investors having a significant impact on investment decisions. Most of them are persuading ESG funds to devote a significant portion of their resources to sustainable investments.
ESG consulting firms have sprung up in response to investor demands and to provide critical answers as to why ESG is relevant. The companies have much-needed data and investment ideas, allowing people to make impact investment decisions with ease.
According to Milos Maricic, President of the Altruist League, “The attention of fund managers has been drawn to investors who are making more firm commitments to sustainable investment. Following COVID-19, increased investor demand could lead to more investment managers allocating resources to ESG.”
Similarly, ESG reporting at the management level has improved dramatically as most companies compete for investment capital from investors looking for long-term investments.
Bottom Line
People have always come together in times of crisis. Similarly, COVID-19 has prompted the investment community to reconsider its capital allocation strategies. Investment managers are being pushed to invest in sustainable projects that seem to be doing well
despite the pandemic and are expected to produce more long-term value due to mounting regulatory and investor pressures.
Social, investor, and regulatory stresses should affirm ESG investing as the new standard as the global economy recovers from the COVID-19 pandemic.