With 2020 witnessing significant global events—including wildfires, the COVID-19 pandemic, the intensified Black Lives Matter movement, and the crisis in Yemen—the landscape of sustainable investing has gained momentum. This is occurring despite the IMF’s forecast of a 3% decline in global growth, marking the most severe recession since the Great Depression and posing challenges that surpass those of the global financial crisis.
In a recent discussion, Claudia Coppenolle, co-founder and CEO of the IMP+ACT Alliance, a public good technology initiative originating from Deutsche Bank, shared insights on how these events are reshaping investment strategies beyond just sustainable investing, impacting the broader asset management sector.
Initiated in June 2020, the IMP+ACT Classification System (ICS) empowers asset managers to categorize and report the social and environmental impacts of their portfolios. This framework offers asset owners a consistent and transparent way to assess impact performance information, facilitating informed capital allocation aligned with the UN’s Sustainable Development Goals.
As a former bank intrapreneur and now an entrepreneur, Coppenolle emphasizes the critical role of digital tools like the ICS in understanding both financial and non-financial repercussions of abrupt market disruptions on investment portfolios. It enables consistency in impact assessment across diverse asset classes, even when asset managers employ varying measurement techniques.
### The Evolution of Sustainable Investing Post-Lockdown
As the world transitions to a post-lockdown environment while confronting rising social tensions, the demand for clarity in how organizations manage Environmental, Social, and Governance (ESG) factors has intensified. Coppenolle asserts that the conversations surrounding the creation of more inclusive societies are taking center stage, driven by the pandemic and social movements like Black Lives Matter.
This context is crucial for those contemplating ethical or sustainable investments. A prevailing misconception is that adopting a specific investment strategy is necessary to manage ESG impacts, often viewed solely through a philanthropic lens. While some investors aim to effect positive change, others recognize the commercial benefits of employing ESG factors to identify investment opportunities, such as companies that reduce costs through energy efficiency or effective carbon management.
However, each investment carries inherent positive and negative impacts. As Coppenolle notes, “The moment you invest, you influence people, the planet, and the economy.” A growing recognition of this reality highlights the need for greater education regarding how ESG and sustainability considerations affect portfolio performance.
“While some attempt to differentiate mainstream investing from sustainable investing, integrating ESG factors into capital allocation and investment strategies reflects sound investing principles,” Coppenolle explains. By transparently measuring and reporting ESG factors, organizations can manage regulatory and reputational risks over time.
### Promoting Inclusive Growth within a Circular Economy
The market’s abrupt shifts have led to a deeper understanding of how sustainability impacts financial performance. Climate risk is now recognized as a significant financial challenge rather than merely an environmental issue. Effective management of this risk has been underscored by the awareness that sustainable funds often demonstrate better risk-adjusted performance. For instance, Coppenolle points out that during the pandemic, ESG funds suffered half the losses of the S&P 500 Index.
ESG portfolios generally emphasize technology and healthcare sectors, which have fared better, while steering clear of heavily impacted industries like fossil fuels and airlines. Viewing investments through the lens of a circular economy—aimed at minimizing waste and optimizing resource usage—has gained traction, particularly as the need for inclusive economic growth becomes more evident. Investments in renewable energy and climate transition initiatives can initiate significant positive changes.
### The Role of Data in Shaping Investment Strategies
As organizations navigate the complexities introduced by the pandemic, there has been a concerted effort to enhance the tracking of ESG performance indicators to foster resilience. This evolution is driving discussions about measuring and reporting ESG risk and impact—essentially, the data challenge.
Numerous organizations, including the IFC, GRI, SASB, UNDP, and GIIN, have made strides in formulating guidance and standards for impact measurement, yet a growing demand for universally accepted principles—similar to IFRS standards—is apparent.
Despite initial hesitance towards ESG-aligned portfolios, large data providers like Morningstar, MSCI, and Bloomberg have progressively tracked the performance of various strategies. Evidence now suggests that ESG portfolios have generally outperformed during the COVID-19 crisis. Coppenolle cites a recent Morningstar report indicating that although the outperformance might primarily be a result of widespread divestment from adversely affected sectors, ongoing studies reveal that sustainable funds tend to match or surpass traditional funds’ performance over time.
As regulatory pressures and investor expectations mount, stakeholders will increasingly seek insights into how companies are managing ESG concerns to foster resilience and rebuild amidst ongoing economic disruptions, societal challenges, and escalating climate risks.