Sustainability is a necessity now
The Covid-19 crisis has not sated the appetite for investing
When the Covid-19 pandemic struck, some suggested that investing sustainably is something best-suited to a bull market — a “luxury good” or “nice-to-have” — but among the first areas to be cut back when times are tough and the economy is receding.
Internationally, it seems that investors have not just stuck with sustainable investing, but have embraced it. Instead of a luxury good, sustainability is seen as a necessity and an idea whose time has come.
The new reality the world is facing has forced investors to consider risk differently, and has highlighted the interconnectedness between social, environmental and economic challenges.
JP Morgan ESG & Sustainability heads Jean-Xavier Hecker and Hugo Dubourg say: “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.”
Indeed, a survey run by JP Morgan asked 50 global institutions (representing US$12.9 trillion in assets under management) how they expect Covid-19 to impact the future of ESG investing. It showed some 71 per cent think it is “rather likely”, “likely”, or “very likely” that a low probability-high impact risk like Covid-19 would increase awareness and actions globally to tackle high impact-high probability risks such as those related to climate change and biodiversity losses.
More immediately, the pandemic has seen investors turn to sustainable and responsible investments as a form of safe haven. This is because companies with strong records on employee relations, environmental sustainability and corporate governance tend to do well over the long-term.
Closer to home, the Aotearoa Circle’s Roadmap for Action identified some of the domestic social inequalities that have been highlighted by the Covid-19 crisis, including:
· Those on lower wages, and females, have been more impacted by job losses and have less certainty about when their jobs may return.
· Those on lower wages have less capacity to absorb financial shocks, meaning their wellbeing has been more impacted by Covid-19.
· Those without digital access or capability have been further excluded from accessing essential health and other services.
· Those with essential jobs are the people we rely upon during a pandemic. Yet they receive little compensation above the minimum wage. This has led to the stark realisation that we need to value these people differently and need to re-think our ideas of value.
The Aotearoa Circle says the rapid behavioural change in response to the pandemic has shown how innovative and adaptive we can be.
It suggests that governments stepping in to become some of the largest consumers via various stimulus programs presents a crucial opportunity to serve two purposes: economic recovery and a climate change crisis recovery.
The Roadmap for Action says: “Our recovery needs to look to reduce the social and environmental imbalances that disrupt our society, and make our economy more resilient for the next generation.
“If the huge stimulus does not simultaneously contribute towards a more resilient, sustainable economy, or worse, sets us back in our response to those issues, there are real risks we leave ourselves further exposed, and we are putting ourselves at a higher risk of funding shortages to achieve such a transformation in future.”
Co-chair of the Sustainable Finance Forum and New Zealand Super Fund CEO Matt Whineray says while the pandemic and the consequential economic destruction looms large, the existential crisis that is climate change is not going away — and will continue to worsen.
“Responding to the pandemic in a way which exacerbates the climate crisis, would be a global policy failure,” he says.
While New Zealand may have lagged behind some of the large international markets, investment in areas that reduce global carbon emissions and address essential social services is rapidly growing.
For example, New Zealand’s sustainable bond issuance is becoming a relatively significant asset class of its own. ANZ/ Bloomberg’s analysis of sustainable bonds in New Zealand by year shows a dramatic rise in issuance from $106m in 2017 to $2.125b in 2020. Over the past three years, some $2.7b in wellbeing bonds have been issued by government housing provider Kāinga Ora to fund sustainable and affordable social housing.
There is also a growing expectation from New Zealanders that their KiwiSaver providers focus on responsible and ethical investment opportunities that deliver positive outcomes aligned with their values.
Further compounding this demand is the rapid growth in millennial investors. This will become even more significant as the largest ever intergenerational transfer of wealth occurs in the near future, putting some US$30 trillion under the control of millennials in the US alone.
A 2019 Morgan Stanley report says 95 per cent of millennials are interested in sustainable investing (compared to 85 per cent of the general population). The report also showed that 85 per cent of millennials believe it is possible for their investment decisions to influence the amount of climate change caused by human activities and 89 per cent say their investment decisions can create economic growth that lifts people out of poverty.
As the government and large corporates in New Zealand ramp up the delivery on their productivity, social and environmental aspirations, the call from investors for increased sustainable investment opportunities will be answered.
Investors will likely embrace the opportunity to provide some of the significant capital flow that will be needed to help ensure New Zealand’s economic recovery is long-lasting and sustainable.