ESG OUTLOOK (part 2)

Defending the three dimensions of ESG

by Ophélie Mortier,
Sustainable & Responsible Investment Strategist at DPAM


In recent years, increasingly-frequent extreme-weather phenomena have put climate change at the heart of media, discussions, debates, etc. The environmental shift has also become a concern for investors. These phenomena are often linked to human tragedies and therefore go beyond the purely environmental dimension. Nevertheless, in terms of regulatory- and moral obligations, both the climate and environmental responsibility have taken precedence over other issues, particularly social issues. Fortunately, they never completely replaced them.

A quick look at the latest regulatory and voluntary developments highlights the importance of investor responsibility in relation to climate change: France’s Article 173 discusses the involvement of investors in the energy transition to a low-carbon economy; the European Commission’s taxonomy, which focuses on two purely environmental objectives; the European regulation of low-carbon benchmarks; the Climate Action 100+ group, which brings together more than 450 investors, representing more than USD 40 trillion in assets under management; the initiative of central banks and global supervisory authorities (NGFS), which recognizes carbon risk as a formal part of their responsibility; etc.

It would be unfair to claim that social issues are no longer part of investors’ concerns and obligations. The European Commission has already announced that it will look into a taxonomy on social issues in a second phase. In addition, several regulations -such as the duty of vigilance in France, or the act on modern slavery in the United Kingdom- have focused on social issues along supply chains (e.g. the Rana Plaza drama in Bangladesh). Most recently Mr. D. Reynders, European Commissioner for Justice, has raised the possibility of a fiduciary duty for companies, cementing their responsibility to defend human rights. The Rana Plaza scandals in the textile sector, the violations of communal rights in huge infrastructure projects, or child labour have been at the heart of responsible and ethical investors’ concerns. Nevertheless, the pandemic and the subsequent health crisis have pulled the social factor back to the forefront, with a strong focus on the human aspect. Sustainable and responsible investment has always taken social factors into account. However, their importance (and therefore their weight in evaluation grids) has varied from one sector to another. As such, sustainable and responsible investment mostly focused on subcontractors and talent management instead of the primary issue of security and prevention of human capital. Could it be that labour laws, which are very thorough in developed economies, have obscured that the primary force of a sustainable company is its human capital?

Environmental experts have spoken out: the contamination of the COVID-19 virus from animals to humans is caused by the massive and rapid deterioration of our biodiversity. It goes to show how closely environmental and human issues are intertwined. This interconnection has long been highlighted by the World Economic Forum in its annual risk report.

Graph 1: The Global Risks Interconnections Map 2020

Source: World Economic Forum Global Risks Perception Survey 2019-2020

Note: Survey respondents were asked to select up to six pairs of global risks they believe to be most interconnected. See Appendix B of the full report for more details. To ensure ligibility, the names of the global risks are abbreviated; see Appendix A for the full name and description

This same report, in 2007, and again in 2008, listed pandemics as a top-10 risk in terms of impact.

Graph 2: The Evolving Risks Landscape, 2007-2020

Source: World Economic Forum 2007-2020

Note: Global risks may not be strictly comparable across years, as definitions and the set of global risks have evolved with new issues emerging on the 10-year horizon. For example, cyberattacks, income disparity and unemployment entered the set of global risks in 2012. Some global risks have been reclassified: water crises and income disparity were recategorized as societal risks in the 2015 and 2014 Global Risks Reports, respectively.

When decision-making focuses solely on the environment, it can hide major social and human realities. This explains the concept of a ‘fair transition’ to a carbon economy. It also explains, among others, the movement of yellow jackets in France. This can happen when climate issues are emphasized over other issues. As such, it may be justified to conduct an in-depth analysis of green bond issuers. Indeed, the objectives of a project, however laudable, should not contribute to the financing of other activities or less virtuous corporate behaviour.

As discussed in our outlook 2020 article early this year, investors will increasingly be called upon to endorse and demonstrate their social responsibility, particularly with regard to human rights. D. Reynders has already announced the introduction of mandatory rules for companies, pushing them to respect both environmental and human rights by 2021. It is likely that the next step, following the example of France’s Article 173, will concern investors and their environmental and social responsibility through their investments.

Such is also the evolution of sustainable and responsible investment: from the approach of a few pioneers some fifteen years ago, the movement has accelerated dramatically. The COVID-19 crisis only reinforced this structural trend. As this niche movement reached the mainstream, practices have evolved, and become significantly more robust. Thus, starting from a reputational approach, sustainable and responsible investment has now moved to an impact approach. Today, investors are called upon to consider their actions from a global holistic perspective and to demonstrate their respective impact. Regulation is holding investors accountable for their social responsibility. Furthermore, it encourages a reduction of investors’ carbon footprint and negative impact (ESG integration). Investors’ personal values and convictions may push them to go beyond their legal obligations, and proactively contribute to the environment as a whole (SRI investment).


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