ONE difference which the on-going coronavirus crisis has over similar global crises in the past is that investors now have sustainable investing as an added option for deploying capital in a world where uncertainty, fear, and unknowns grip the market.
This is because the integration of environmental, social, and governance (ESG) factors into the investment process in recent years has made sustainable investing more accessible to a bigger number of investors who did not have this kind of access in the previous crises.
Following the 2007-2008 global financial crisis (GFC), for example, the US Federal Reserve, using quantitative easing (QE), pumped massive amounts of capital into the financial system reaching a peak of US$2.1 trillion by 2010. Trillions of dollars more of capital were pumped into the global financial system not only by the Fed but by all the major central banks in the succeeding years.
While the QE was successful in its objective of shoring up the global financial system against systemic risk at that time, critics argued that there were massive defects in the distribution of capital resulting in massive income inequality that is plaguing the world today. In separate reports issued in 2012 and 2013 the Bank of England and the US Fed admitted that their QE policies benefited mainly the wealthy at the expense of the working class.
It has been argued that one of the defects in the distribution of QE capital was the lack of or absence of financial instruments that were suitable for a more egalitarian distribution of wealth at that time.
In the wake of the coronavirus crisis the global central banks are again preparing to unleash about US$8 trillion in QE in order to save the global economy. But unless the distribution of this massive amount of capital is done right, it risks repeating the mistakes of the previous QE and will further aggravate the already serious income inequality in the world.
Although the concept of ESG integration and sustainable investing may have already existed back in the years immediately following the GFC, at that time they were still mere concepts in the minds of bankers, investors, and asset managers.
But with today’s coronavirus crisis, ESG integration and sustainable investing are already mainstream investment strategies and asset classes that are readily accessible to most investors and asset managers. Therefore, they provide a viable option for redistribution of capital in a way that will not result in massive income inequality, particularly, if done properly under the United Nations principles of responsible investment (PRI).
In addition, the legal and regulatory framework for the creation of sustainable investment and ESG-focused financial products and instruments, which were absent post GFC, now exist. There is now a wide array of financial instruments that are geared towards sustainable investing such as green bonds, social bonds, ESG themed mutual funds and ETFs, for example.
“I’d argue that sustainable investment was available in the past but they weren’t as accessible (as they are today). Now we have commercial bonds, for example, and integrated ESG funds which are looking at things from a more holistic perspective and increases the ability of people to deploy capital,” says Gabriel Wilson-Otto, head of Stewardship Asia at BNP Paribas Asset Management.
Sustainable investing may in fact be the means by which a sustainable recovery for the global economy can be achieved in the wake of the coronavirus crisis by changing the overall mindset of investors, asset managers and policy makers towards working on collective and collaborative solutions to global problems.
“If we look at the coordinated global response as to how capital is being deployed, if we look at the run up to the current situation, the actual amount of capital that had been flowing to sustainable alternative investments and sustainable finance has been increasing, while the cost of ESG solutions relative to non-ESG solutions has been falling. And so, I think you have an economic outlook combined with greater social awareness and willingness than we had in the past. And for me the interesting question is the extent to which this could contribute to global collaboration,” Wilson-Otto says.