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There has been a greater emphasis on how companies treat their customers and employees in the context of an increased awareness and appreciation of the environment in which they operate. The underlying cause was of course the pandemic which led to greater sensitivity to vulnerabilities and weaknesses in a range of systems that went beyond healthcare and raised questions about our world’s resilience to shocks, including business resilience.
This has created a positive wind for ESG issues and the need for more funding to address these issues. At the start of 2020, we saw a shift from green financing to social bonds, which saw record issuance in 2020.
Over the year, significant longer-term green finance commitments emerged. This was driven by the desire to “build back better” in a post-pandemic world. This translates into an immense interest in supporting a broader energy transition.
This trend has been spurred by a series of additional commitments, including setting firm targets for net zero greenhouse gas emissions over the coming decades, notably in China, Japan and South Korea. In my opinion, this could be a game-changer both in terms of environmental impact, but also more broadly with regard to the investment themes that this wave of investments can support.
2020 – An extension of the set of ESG opportunities
The events of 2020 will have major consequences for ESG investing both in terms of asset classes and sectors.
First of all with regard to asset classes, we have seen a huge commitment to financing infrastructure projects. This will boost green bond issuance and green finance more generally. We anticipate record emissions this year and strong emissions in the future to fund these projects. So this should be an area of interest for investors.
Second, when we think of ESG integration in equity markets, there are two key ways to gain exposure:
- Risk Management – Assess the resilience of your business. COVID-19 has shown us that certain business practices and assets, previously considered robust, have turned out to be more volatile than expected. ESG analysis can really help investors assess risk and accurately assess risk exposure.
- The other aspect of thinking about exhibitions concerns themes where, for many observers, there is considerable upside potential. In 2020, the renewable energy sector outperformed very significantly. Major commitments have been made to build green financing projects and on net zero commitments. I would expect renewables to benefit from a multi-year tailwind. I expect the United Nations Biodiversity Conference in China in May to generate greater interest in ecosystem restoration / preservation as well as broader environmental protection. Other themes that we think investors should have on their radar include environmental services (waste, recycling and water treatment) and financial inclusion (payment platforms, access to finance / credit).
Of course, the challenge for investors is to choose truly “green” investments. We believe that integrating ESG criteria into the stock selection process is key to being able to assess and manage risk and determine a company’s resilience and upside potential. This is a case of better understanding a business leading to better investment decisions.
Consolidate ESG investment
In this sense, 2020 has strengthened and consolidated our view that an ESG assessment provides essential information about the success and resilience of a company – or other securities issuer – over the long term.
Certainly, problems around the definition of ESG remain, but 2020 has seen an acceleration in the trend towards more transparency and harmonization on the underlying criteria. There is still work to be done.
To illustrate this point, when rating agencies conduct a conventional risk analysis of sovereign bonds, there is a strong, almost perfect correlation between the ratings of different agencies. When it comes to ESG ratings, the results are much more diverse. This is partly due to different focuses on what constitutes ESG and the risks it poses to financial performance, but also the choice of data used and the quality of the data.
Continue work on data quality and reporting transparency
This is why, at BNP Paribas Asset Management, we have set up our own ESG scoring system to guarantee the consistency and transparency of our offer. In the context of a growing interest in ESG, we believe that there is a great need for clarification, harmonization, regulation and standardization.
So, “to lead by example” we participate in many bodies and committees working on improvements in this area. An example is our contribution to work commissioned by the European Commission on a taxonomy, or classification, defining which activities are sustainable and under which circumstances. We have welcomed the efforts of regulators and we are contributing to them to improve the quality of ESG data and broader reporting by issuers and asset managers.
Conclusion
The pandemic has led to a greater awareness of ESG issues, both in life in general and in business. This has strengthened the case for investing from an ESG perspective.
For an investor, it is attractive because it is a way of doing good. Financially, we think this can be rewarding as we believe that ESG investing is directly compatible with higher risk-adjusted returns.
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All opinions expressed herein are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may have different views and may make different investment decisions for different clients. This document does not constitute investment advice.
The value of investments and the income from them may go down as well as up and investors may not get their initial investment back. Past performance is no guarantee of future returns.
Investment in emerging markets, or in specialized or small sectors is likely to be subject to above average volatility due to a high degree of concentration, greater uncertainty as less information is available. available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, portfolio transaction, liquidation and custody services on behalf of funds invested in emerging markets may involve higher risk.
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