What the pandemic has taught us about Sustainable & Responsible investment

by Ophélie Mortier,
Sustainable & Responsible Investment Strategist at DPAM


We no longer need to mention to which extent this “simple” virus has had a major impact, both in terms of its geographical spread as well as its magnitude between and within economic sectors.

In addition, due to its importance and the large number of affected activities, detailed research has already studied its impact on specific economic sectors as well as on social and psychological behaviour. These studies also attempt to put forward certain scenarios of a post-COVID world. Some focus on the upheavals that have taken place, while others tend to believe that, after our recovery, everything will simply return to the way it was before.

What about sustainable and responsible investment? For many, this has been a structural trend, even before the worldwide containment. What should we expect from this investment’s evolution, its possible adaptation and its global performance?

We would like to have a closer look at the four main lessons which the crisis has taught us:

1. SUSTAINABLE DEVELOPMENT (read full article)

A worthwhile pursuit no matter the circumstances

The pandemic and its major consequences on the global economy have demonstrated – once again – that companies deemed ‘sustainable’ have been more resilient from an accounting and financial perspective. In addition, they outperform the financial markets.

This superior financial performance has not only been reflected through the companies’ superior returns, but also through their risk profile. It does not matter whether the observations are made on the European-, American- or Emerging markets, the conclusions remain the same: higher alpha and lower risk (i.e. lower risk of bankruptcy, downward revisions of profitability forecasts, yield volatility, etc.).

Sustainable and responsible investment focuses on investing with conviction, and with an eye on value creation in the medium- to long term. As a result, this investment is not meant to exploit ephemeral bubbles or consider temporary opportunistic acquisitions. On the contrary, it is designed to support companies in their winning strategy of value creation. In doing so, these sustainable companies take into account upcoming innovations and future opportunities, and anticipate all potential risks.


A holistic approach: humans and the environment on the same footing

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. This phenomenon is often linked to human tragedies and therefore goes 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 ones. Fortunately, they have never completely replaced them.

The pandemic and the subsequent health crisis have pulled the social factor back to the forefront, with a strong focus on the human aspect.

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.

Investors will increasingly be called upon to endorse and demonstrate their social responsibility, particularly with regard to human rights.

From the approach of a few pioneers some fifteen years ago, the sustainable & responsible investment movement has accelerated dramatically. The COVID-19 crisis has only reinforced this structural trend. As this niche movement reaches 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.


All stakeholders teaming up for the common good

COVID-19 emphasized the social factor -and in particular human capital- as a key pillar of the company. It is the employer’s responsibility to put in place preventive and protective measures for its workforce.

Greater automation could solve the problem of business continuity. It is clear that the process of automation is already well underway, and will continuously improve over the years. However, machines are not the answer to everything. They do not replace the individual. Unfortunately, The OECD’s latest PISA study finds that, nowadays, the majority of students are poorly prepared for tomorrow’s jobs. Although the labour market has undergone major changes in recent years, our educational practices have not kept pace.

This brings us to the role of governments: At a time when international cooperation has become a sine qua non, the behaviour of countries has swiftly demonstrated that dialogue and the pursuit of a common objective is not currently on the horizon.
China’s economic recovery does not bode well for the climate. Additionally, the repeated provocations of the American President are no more reassuring for a green and sustainable recovery. Fortunately, the European Commission has shown some willingness to move forward on the issue of sustainability.

China’s economic recovery does not bode well for the climate. Additionally, the repeated provocations of the American President are no more reassuring for a green and sustainable recovery. Fortunately, the European Commission has shown some willingness to move forward on the issue of sustainability.

Beyond the actions of governments and central banks, the crisis may also call into question the global financial system’s ability to meet the objectives of the new century. It is therefore necessary to continue to draw on the valuable lessons of the recent crises, including the current COVID-19 pandemic. It will allow us to maintain a medium- and long-term focus, and support cooperative actions for a more sustainable economic and financial environment.

Given the current situation, it may be advisable to approach certain governance principles with more flexibility than usual. The COVID-19 crisis has strengthened stakeholder governance as opposed to shareholder governance. A company’s broader responsibility to society as a whole is at the heart of the debate, as is the search for a more balanced treatment of the different stakeholders. The continuous integration of ESG factors allows for the creation of a virtuous circle with longer investment horizons and ESG best practices.


Should we fear that the postponements of major meetings such as COP 26 will slow down our recent advances in responsible investment? It is important to distinguish between, on the one hand, progress in regulating sustainable and responsible investment, and on the other, progress in green or social regulation, which is more directed at business and government. Similarly, we must make a distinction between European and international ambitions.

On November 14, 2019, the European Investment Bank published its latest investment strategy, which has sought to align its financing activities with the objectives of the Paris Agreement as of 2020. However, we must ensure that the European Central Bank’s support of the economic recovery does not cancel out the sustainable goals of the European Investment Bank.

At the level of the European Commission, the Green Deal aims to achieve climate neutrality by 2050, and pushes the EU to increase its climate ambitions. The details of the Green Deal are still largely unknown. However, it will significantly impact all economic sectors. We must also invest in the reconversion of certain sub-sectors or activities to ensure a just transition. These investments must be made within the next 5 to 10 years, otherwise the accumulated delay will only aggravate the situation and increase the necessary funding.

The COVID-19 crisis demonstrates why -now more than ever- sustainable and responsible investment needs a clear and common language to support its structural growth.

Several initiatives (e.g. the SASB, GRI or the TCFD recommendations) can help responsible finance practitioners. However, their diversity can also create a lot of confusion. The European Commission’s Green Taxonomy could potentially address this issue. It does not exclusively target green products, but touches on all financial solutions. Additionally, it can even impact corporate governance and strategy by questioning certain business activities, or influence future M&A. As such, this strategy has a significant impact across the entire investment value chain.

In conclusion, sustainable and responsible investment focuses on financing entities that have embraced the concept of stakeholder governance, and have clearly identified the risks and opportunities of current environmental, social and governance issues.


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