Sustainability’s new era

Green Daily

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Sustainability will probably redefine itself in the Covid-19 era. It may need to.

Corporate social responsibility, or CSR, has become a shorthand for what companies do to integrate environmental, social and governance issues into their businesses. Until now, it's been a mashup of philanthropy, employee engagement, renewable energy programs and investor relations. But the coronavirus pandemic will press industries and investors to make sure CSR is truly connected to delivering value.

The frenzy around sustainability and ESG investing at the end of last year might have led to some froth, but this is a moment when the wheat will be separated from the chaff, says John Goldstein, head of the sustainable finance group at Goldman Sachs.

The virus has unexpectedly turned out to be "a stress test for a field that was ready for it," Goldstein said. "The stuff that was being done more for appearances or a label is getting constructively rationalized."

Investors are still holding conversations with companies on decarbonization. While emissions have fallen around the world due to reduced economic activity, investors may still want to see companies have a long-term plan beyond any temporary reductions. The fossil fuel industry will keep seeing pressure, particularly as it seeks stimulus from governments. Investors will keep pushing against methane emissions since the super-polluting gas is still rising.

"Investors will give companies more space to deal with short-term crises, but this has just made it ever clearer what's at stake and what's needed to build more resilience in the future," said Beau O'Sullivan, communications manager at U.K. non-profit Share Action.

Here's how investors and companies see the corporate sustainability landscape shifting:

Mobility data is seeing new interest, but broader transportation initiatives could end up taking a backseat as more people stay at home. Still, companies that were planning to electrify fleets or make transportation carbon neutral may find ways to meet those long-term goals, particularly if they are tied to stimulus.
Corporate renewable energy purchases could become that much more important as solar installations face challenges on the residential side, though timelines for those projects are likely to be pushed out.
Health care and broader issues around food, obesity, and tobacco will face more investor interest in the face of the virus. Investors are already pressing pharmaceutical makers to work collaboratively.
Programs on plastic reduction, a circular economy and new sustainable materials could lose ground if they aren't tied to the core purpose of a business. The recycling and waste industries are already under stress, though in some cases supply bottlenecks could push companies to explore new materials.
Disclosure about workforce structure and supply chains will be increasingly sought by investors, as the pandemic has highlighted and exposed risks inherent to the system. Companies are used to getting hundreds of surveys on sustainability issues, but the current turmoil will "clarify the mind tremendously" around what disclosures are absolutely necessary and most valuable, Goldstein said.

Governance may become more central. Investors will have questions about dividends, share buybacks, and executive pay in the face of the crisis. And corporate directors who serve on five or six boards, or are otherwise stretched by their day jobs, will have to show that they can really serve in this environment. "If you are a CEO or CFO on a board, you need to be worried about keeping your own company alive," said Jonathan Bailey, head of ESG investing at Neuberger Berman.

The recent surge in activity around ESG investing means that more asset owners, money managers, and lenders are newly committed to ESG and may be approaching investment from this lens. The resilience of ESG funds in the past few months of market turmoil may have even strengthened their resolve. "Funds that hadn't been known for ESG in the past will be thinking about this more holistically today," said Bailey. "It will eventually be a great opportunity for long term thinking-CEOs to get on the same page as long-term active owners."

Sustainable Finance in Brief

Wealthy investors in Asia are showing more interest in sustainable investment as the pandemic focuses attention on health and the environment, and ESG fund performance has been resilient, according to UBS.
Development banks have sold $10 billion in coronavirus bonds. The jump may help social debt escape the shadow of green bonds.
A climate-skeptic money manager's firm plans to make itself more green.
Manulife Investment Management named Peter Mennie as global head of ESG Research and Integration. Mamadou-Abou Sarr, who directed product development and sustainable investing at Northern Trust, left the asset manager to launch a new sustainable investment firm focused on quantitative strategies and big data with Valor Equity Partners. Generation Investment Management hired The Church of England's head of responsible investing, Edward Mason, to lead engagement.