ESG during and after the COVID-19 pandemic
With a market worth an estimated US$ 30 trillion, ESG (Economic, Social and Governance) investing is proving very popular in many countries and across various sectors as it gradually transforms into the new norm of investment funds.
ESG has seen an exponential rise in the past two decades. Despite the current COVID-19 pandemic it has, by and large, a more positive outlook when compared to most other investments.
Unpacking ESG – pre-COVID
ESG investing falls under the umbrella of socially responsible investing whose aim is to add a layer of non-financial indicators like employee turnover and accountability measures to evaluate investment opportunities and risks. Research shows that ESG can help reduce investors’ portfolio risk while improving performance with the feelgood factor of altruism being the icing on the cake.
The rising trend of ESG policy implementation is notable in businesses too. As with investors’ portfolios, businesses can use ESG as a risk mitigant while brushing up their public image.
There is a higher level of interest and awareness among businesses on the ESG issues which has not been seen before. Millennials have shown a tendency towards social and environmental responsibility in their purchasing decisions and investment choices which has helped re-define how companies serve them utilising ESG-integrated business models to provide a more competitive proposition.
This brings into view risk management and client demand as the main drivers for ESG integration which its proponents have long touted for.
From an investment standpoint, ESG practices are highly appropriate in the African context. Boasting some of the fastest growing economies in the world, bountiful natural resources and a youthful population to boot, Africa has a lot to offer. ESG is beneficial to the African landscape because it obliges local businesses and investors into Africa to think long term; to employ sustainable practices and to be accountable and transparent in their dealings which is a win for all parties involved.
Development finance institutions (DFIs) have long since deployed funds linked to ESG outcomes as a route to sustainable development. With a lot of DFIs pumping funds into emerging African economies, it’s no wonder that African businesses are adapting to ESG principles and business models.
ESG performance during COVID
ESG is yet to be stress-tested and the market volatility brought on by the COVID-19 pandemic offers an opportunity for just that. The performance of ESG funds has been largely positive with more net inflows than traditional asset classes in Europe. They have also outperformed similar funds across European and US markets. One possible reason could be their low exposure to the fossil fuel and high emission sectors like the airline industries. This has probably provided a buffer to the market turbulence and economic uncertainty arising from the pandemic.
This resilience in a down-turning market is just the confidence booster needed by investors and businesses who have adopted ESG philosophies. It can be earmarked as a proof of concept for the more holistic strategy and no doubt convert those who shied away from ESG or only used it mainly as a whitewashing PR and marketing exercises.
ESG beyond COVID
ESG is still unstandardised despite gaining momentum of businesses and investors looking to incorporate it into their decision-making processes. This leaves room for institutions who would rather use ESG as a PR tool than an actual integrated management or investment philosophy that is implemented and adhered to.
It can be argued that market conditions created by the pandemic haven’t as yet reached recession levels but there is no doubt that we are in unchartered waters and ESG has shown its merits.
Companies and their stakeholders who are eying ESG should take a practical approach to incorporating it into their business models. Standardisation will help the industry to ‘speak the same language’ and create a results matrix showing key progress indicators that can help monitor achievements and objectives that are expected to be achieved. In addition, having a larger comparable database that can be tested and improved upon could further feed into the ESG policies and integration in practice.
The build-up of ESG data for Africa could have a significant impact for investment and business. Reducing the knowledge gap and perceived “opacity” will boost investor confidence and will allow for better assessment of individual businesses and comparability among different businesses. More headway can then be made in pushing Africa forward as a prime business and investment destination once there is more transparency and data necessary for decision-making.
In Zambia we see that looking through the ESG lens goes a long way in making businesses relevant for the long-term. It is also satisfying for businesses that want to reduce their risk exposure while investing more sustainably and delivering positive environmental and social benefits in the process. ESG has been trending upwards and it appears the appropriate COVID-19 response is to further crank up the ESG efforts.
An indication that ESG is not only a fad, is when key players like UBS, BlackRock, Citigroup and Deutsche Bank position themselves to invest billions into funds that fulfil the ESG criteria. Businesses in frontier market economies like Zambia need to properly position themselves to ensure that they do not miss the ESG train as it comes powering through.