A Look At Values, ESG And Ethical Investing In 2021, And Beyond
The future is dependent on opportunity, but opportunity is what we make of it. Our values help determine the direction we take as human beings. It has taken a global pandemic and a public health crisis in 2020 to concentrate minds on the fragility and interdependence of our ecosystem. But the financial system is a human (and also a largely male) creation, one that has become disconnected from some of the fundamental values we hold.
It is deep concern about that disconnect that is behind the steady rise of interest in ESG issues as a fundamental metric in measuring corporate behaviour. Ethical investing offers a way of re-defining what it is we value. Working collaboratively to ensure that the financial markets reflect those restated values will shape the face of the future we choose.
Since the 2008 financial crisis there has been much debate about the culture of the financial services industry, and its relationship with the society which it intends to serve. Its legacy more than a decade later has been a deep erosion of trust across the board – in governments, in financial regulation and consumer protection, and in the public’s understanding of the purpose and the workings of businesses that manage money.
More often than not, it has seemed to the person on the street that managing other people’s money is really about creaming off as much as possible for personal gain. In the eyes of the wider population, financial institutions and their top, (also predominantly male) management teams have come to represent a systemic inequality that is unlikely to change. Meanwhile, rapid technological change has empowered individuals by giving them immediate access to knowledge and more consumer choice.
This knowledge empowerment has, via rapid communication, led to vast networks of thought collaboration. “Ideas are not real estate” said an American artist, by which he meant that they were there to share and grow - rather than buy and sell, limited to a transaction. From the halls of the United Nations to the initiatives of government leaders, CEOs, institutional investors, regulators, not-for-profit organisations, think-tanks and independent thinkers, there has been a steady rise in the exploration of the underlying issues that have an impact on human motivation and productivity.
In report after report, they have repeatedly returned to universal ESG concerns: E for the environment around us including the built environment we create, S for social issues including diversity, equality, inclusion, human rights and the fairness of societal construct, and G for the governance systems we draw up and the standards we set.
There have been attempts to restate fundamental ethical principles via ‘codes’ in business, to encourage bankers to take oaths to demonstrate their integrity, to amend corporate governance codes to emphasise values of equality, diversity and inclusion. In 2015, the UN articulated many of these values in a different way, setting out 17 Sustainable Development Goals (SDGs), with both equality and sustainability at the core.
The same year, the Task Force on Climate-Related Financial Disclosure (TCFD) was created by the United Kingdom’s Financial Stability Board (FSB) to develop consistent climate-related financial risk disclosures for use by companies, banks, and investors in providing information to stakeholders. It has been steadily building a framework for such disclosure over the last five years, and an extended global network moving towards the same goal.
Investors have been moving steadily towards the recognition of non-financial capital, paying attention to all the components of ESG in their activism, their stewardship and their corporate dialogue. From the consideration of working conditions and standards in supply chains to boardroom composition, values of equality, fairness, representation and inclusion are being re-affirmed in verbally, and through action.
Coinciding with rising concern across the globe of the need to act on the environmental and human impact of a climate crisis that has been left to become an emergency, a younger generation has found its voice and its own leaders to fight for its future. It has a millennial generation to look to for its immediate direction. Activists too young to remember the anti-apartheid campaign in South Africa can see for themselves the successful escalation of stigma around fossil fuels and the resulting roll-out of divestment at university endowments – from Unity College in Maine back in 2012 to Oxford University in 2020.
Large sums of money are now being moved by citizen empowerment, which has become stakeholder activism. Businesses are being shown by civil society that if the business defies the surrounding social values, it no longer has a social licence to operate.
Pensions, which have for decades been in a corporate black box as a hidden corporate governance issue, are under scrutiny as never before. When New York State, responsible for the third largest pension fund in the United States, says it will divest its $226 billion portfolio from fossil fuels by 2025, the world listens. It has also promised to completely decarbonise the fund by 2040, leap-frogging the goals of the Paris Agreement of 2015.
In total, New York city and state pension funds amount to $500 billion that will not be going into fossil fuels, sending a loud message to Wall Street. Being ahead of the trend allows leadership: Unilever has just become the first FTSE 100 company to offer shareholders a recurrent say on its efforts to address global warming.
Even as concerned environmentalists and climate activists everywhere had begun to despair of the lack of action since Paris in 2015, this has become the year of hope. Against the backdrop of the ongoing ravages of Covid-19, the potential power of collective crisis to unite human beings into into action has been demonstrated.
All eyes in 2020 were on the global pharmaceutical industry, and even while speculation on vaccine prospects has fuelled short-term share price gyration, a new language around values has appeared. Astra Zeneca’s “Oxford vaccine” was developed with a different approach to profit, while Cure-Vac, the German pharmaceutical company has spoken of “ethical margins” for shareholders.
The arrival of a vaccine has meant we dare to look towards a post-pandemic economic global recovery, and it now looks undeniably green.
This should mean the channelling of funds in the future to projects around sustainability, clean energy and renewables. But the pandemic has also highlighted and contributed to economic inequality, about which there is growing anger among citizens, and stakeholders. They have seen their jobs disappear, their governments unable to respond as fast or as well as they always assumed that they could, and their families suffer economic hardship. If they have pensions, they will begin to question them now, as never before.
In challenging markets investors large and small will note the market intelligence: in 2019 nine of the biggest ESG mutual funds outperformed the S&P 500. Ethical investment started by being an exclusionary approach – avoiding tobacco and guns. But ESG provides a way increasingly for a positive return, and the opportunity lying within a green recovery from this pandemic takes an academic debate about purpose with profit into reality.
On climate action, the UK is hosting the COP26 summit in November, postponed because of Covid-19. It has been quick to seize a multiple opportunity presented for strategic change, economic growth and national public engagement. But sustainability standards on ESG are critically needed to counter the calls of greenwashing and hype. The power of ethical investment lies in moving finance to make an impact, and agreement on standards on criteria is critical for credibility, governance, and momentum.
Global capital expenditure on infrastructure now coincides with a massive growth of investment in funds focusing on ESG issues, as well as the rising issuance of green bonds. According to Climate Bonds, the international investor-focused not-for-profit, global issuances passed US$150bn in October 2020 and the yearly global green bond and loans market has reached $194.6bn.
Encouraging the acknowledged growth and resilience of green finance should be a post-pandemic mantra as part of re-thinking the future. Because the future of ethical investing is about looking for impact on the ESG issues that humanity values, and that define us as human beings.
Note - this post was written in late December 2020.
Image credit: Slava on Unsplash
