In this, our first annual Environmental, Social and Governance (ESG) and Sustainability Report, we will attempt to review the extraordinary circumstances under which the broader sustainability movement operated during 2020, and also look ahead to envisage what sort of world will emerge from the COVID-19 pandemic. Of course we are not fortune-tellers, but we have identified constants within certain ESG themes that, coupled with a post-pandemic shift in momentum, may become more prominent. It is our job as investors to try to comprehend the nuances of these forces, support those we deem important, and position our portfolios accordingly on behalf of our clients.

In 2020 ESG maintained its prominence in the investment world. Flows into ESG funds continued at a rapid pace, outstripping a number of other asset classes and investing styles.¹

This was also a year when the ‘social’ element of ESG took center stage. In recent years, environmental considerations have dominated discussions on sustainability, but with the COVID-19 pandemic and protests around the world against racial inequality, social factors came to the fore.

As the coronavirus spread in early 2020, governments enforced lockdowns, many businesses were severely impacted, and healthcare systems globally were put under intense pressure. While governments implemented financial relief programs, corporations also had to play their part to help steer the broader economy through the crisis. Supply chain risk and workplace culture became important factors for companies to manage. The businesses that were able to demonstrate the resilient operations and fair treatment of employees benefitted significantly. Companies were judged on how they protected their workers and how they treated customers. In some cases companies even built further brand recognition by going above and beyond to help society get through the crisis.

The protests against racial inequality, particularly in the U.S., reverberated around the corporate world. Companies reconsidered their role in how society addresses inequality and the importance of ensuring that their policies were appropriate to help promote greater diversity and inclusion.

Given the terrible impact of Covid-19 on health and communities around the globe, it would have been unsurprising if environmental issues had been forced to take a back seat while global economies addressed the health crisis, as well as the ensuing economic crisis. However there was an encouraging reduction in global carbon emissions, predominately due to the significant decrease in travel and commuting but this was not expected to last for long. (Exhibit 1)

Exhibit 1: Global CO2 emissions from fossil fuels by region

Source: Global Carbon Project. Data as at December, 2020.

As the initial phase of the pandemic passed, there were concerns that governments would be so focused on reopening economies that the measures to fight climate change that had gained momentum in recent years would need to be put on hold until after the crisis was over. These fears were unfounded, however, as it became clear that the decarbonization movement was not going to slow down and would play a significant part in the recovery with greater investment in that area. In what was an unprecedented structuring of a stimulus package, the European Union (EU) announced that 30% of its €1.8 trillion EU Recovery Fund would be dedicated to fighting climate change.² This is by far the greatest share of an EU budget being allocated to ‘green’ activities, and serves as a signal from regulators that they continue to be focused on the decarbonization journey. On top of this, the EU has continued to increase its funding to developing countries to help mitigate and adapt to the impact of climate change. (Exhibit 2)

Exhibit 2: Europe’s contribution to climate finance (€ bn)

Source: Council of the European Union. Data as at December, 2019