The year 2020 will be remembered worldwide through the lens of the Covid-19 global pandemic. The virus has impacted all parts of our existence; financial and economic systems, healthcare capability, work environment, movement of people, communities and personal lives to mention a few. The media has provided an avalanche of information on how the pandemic has impacted the globe. One aspect of interest from an investment perspective is consideration of an investment’s resilience versus adaptive capability. Scott Nadler has provided an excellent analysis of this in his contribution to the Tomorrow publication and in this podcast. Investments’ increased resilience and adaptive capability will be sought after outcomes from now on.
The last few years have seen an increasing rate of capital flow into ESG related investment products. 2020 saw a further acceleration of this on the back of resilient performance by ESG and Sustainability funds through the pandemic. In the public markets, the total assets in sustainable funds hit a record of almost USD 1.7tn in 2020, up 50% from 20191. In the private markets, we have seen a similar trend, under the banner of impact investing.
Impact investments, as defined by the Global Impact Investing Network (GIIN)2, are ‘investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return’.
ESG investing assesses environmental, social and governance factors as a financial risk mitigation, whereas impact investing pro-actively targets a specific positive impact outcome.
The term impact investing was coined in 2007 and has in the last 13 years been one of the fastest growing areas in asset management. The below table indicates the impact investing growth according to the GIIN’s Annual Investor Survey Reports3
| Reporting year | No. of respondants | Capital invested (USDbn) |
No of deals | AUM (USDbn) |
Increase in AUM |
|---|---|---|---|---|---|
| 2014 | 146 | 10.6 | 5,404 | 60 | |
| 2015 | 158 | 15.2 | 7,551 | 77 | 28% |
| 2016 | 209 | 22.1 | 7,951 | 114 | 48% |
| 2017 | 226 | 35.5 | 11,136 | 228 | 100% |
| 2018 | 266 | 35.0 | 13,358 | 239 | 5% |
| 2019 | 294 | 47.0 | 9,807 | 404 | 69% |
AUM: Assets Under Management
The annual surveys provide insights from the world’s leading impact investors and include mostly asset managers, as well as Development Finance Institutions, family offices, foundations and pension funds. The bulk of the investments were in private debt, equity and real assets. Prominent growth sectors included energy, finance, technology, housing, water & sanitation, food & agriculture and healthcare.
The GIIN estimates the total impact investing market size at USD 715 billion and more than 1,720 organizations (2019: USD 502 billion, 42% increase).
This growth is further evidenced by the rise of sustainable bonds. According to Bloomberg4, the global sustainable debt market grew 29% to a record USD 732 billion in 2020, with the green bond market expected to reach USD 1 trillion in 2021. Social bond issuance in 2020 jumped 7-fold to USD 147.7 billion, helped by a substantial increase in bond issuance amid the Covid-19 fallout.
Impact investments can be made in several ways; through a traditional model aligned with the theory of change, the concept of additionality and purpose-driven companies, to a more mainstream approach that focuses on medium and large businesses that deliver products or services to benefit society and the environment.
The world faces enormous social and environmental challenges, and impact investing is critical in addressing these. According to the World Economic Forum5, there is a USD 2.5 trillion gap in achieving the United Nations Sustainable Development Goals (SDG’s). If anything, the Covid-19 pandemic magnified the social inequalities and environmental crisis we are facing on a global scale. The pandemic is a catalyst for change and demonstrates the need for more impact investing to step up efforts to deliver on the SDG’s.
“The size of the impact investment network and the scale of the market are real signs of the true potential of impact investing. There’s a growing recognition that if we do want a world that’s sustainable, just, and inclusive, we must invest differently. People are realizing that issues like climate change and inequality are continuing to advance around the world. Even pre-COVID, there was a recognition that investors and businesses need to operate differently.” – Amit Bouri, Co-founder and CEO of the GIINClimate change as arguably the greatest challenge facing our world has been well established for some time now, and continues to be the priority driving force behind the rise of ESG in capital markets. It will remain the key trend for the foreseeable future. Although through the pandemic there has been understandably other focuses on health, well -being and economic impacts and recovery, it is equally understood that we cannot delay in adequately addressing climate risks. It is also now well established that climate change is not a future event we are still waiting to happen, it has already occurred and continues to occur in real time. In other words, we are living it, and a certain level of negative impact is already locked in. Climate risk actions are therefore not about avoiding negative climate related impact entirely, rather they are about reducing the negative impacts as much as possible.
‘McKinsey research shows that if we fail to adapt and dramatically reduce emissions, hundreds of millions of lives, trillions of dollars of economic activity, and the world’s physical and natural capital will be at risk. Importantly, a low-carbon economic recovery could not only initiate the significant emissions reductions needed to halt climate change but also create more jobs and economic growth than a high-carbon recovery would.’
The Intergovernmental Panel for Climate Change’s (IPCC) Special Report on Global Warming of 1.5°C is now opined on alongside the Paris Agreement, as the world realizes that limiting global temperature rise to below 2°C may not be enough, with less and less time to achieve this.
Build-back-better:
Linked to the record capital inflows to ESG based investment products, is the drive by many governments to ‘build-back-better’ with the economic stimulus packages being rolled out globally as a response to the economic impacts of the pandemic. The key concept here is that future capital investments should be in line with a green economy outcome. This approach sees green economy assets prioritised to receive funding, driving the transition to a low carbon and socially inclusive future economy. The question then arises, which assets and investments fall under the green economy? To answer this question governments and institutional investors are turning to green taxonomies, which establish criteria and certain asset classes that would be deemed to be green economy assets. The most globally recognised taxonomy at this stage being the European Union Taxonomy.
For many investors, the continued growth of ESG in financial services has largely been due to increased awareness of the urgency to address environmental and climate change risks. The ‘S’ in ESG remains arguably the most challenging to assess, analyse and embed in investment strategies, according to a 2019 Global ESG Survey by BNP Paribas6. The United Nations Principles for Responsible Investment shares this sentiment: ‘the social element of ESG issues can be the most difficult for investors to assess. Unlike environmental and governance issues, which are more easily defined, have an established track record of market data, and are often accompanied by robust regulation, social issues are less tangible, with less mature data to show how they can impact a company’s performance. But issues such as human rights, labour standards and gender equality—and the risks and opportunities they present to investors—are starting to gain prominence’7. Due to their complex, qualitative nature, social ‘S’ aspects have tended to receive less attention than ‘E’ and ‘G’ aspects.
The Covid-19 pandemic thrust human and worker rights into the spotlight and exposed the inequalities and structural weaknesses of our economic-, social- and healthcare systems. While the pandemic is primarily a public health emergency, the consequences have shown that it is much more than that, threatening the livelihoods and wellbeing of millions. Poverty, lack of social safety nets, inadequate health care, income inequality, gender based violence, lack of technology and inadequate worker rights protections were just some of the issues Covid-19 exposed. The most vulnerable in society have been the most negatively impacted – including women, children, the elderly, the disabled, migrant and low skilled workers.
‘A human crisis that is fast becoming a human rights crisis’ - UN Secretary General Antonio Guterres, April 2020.
The United Nations estimated 2.2 billion people were unable to wash their hands regularly because of limited access to water in 2020. Furthermore, 1.8 billion people could not properly social distance due to living conditions in overcrowded housing or being homeless on the streets8. Illness and death from Covid-19 has been higher among communities that contend with poverty, unfavorable living and working conditions, discrimination and social exclusion.
According to the World Bank9, more than 100 million people were pushed into extreme poverty because of the pandemic and the International Labour Organization (ILO)10 estimated that the equivalent of 305 million jobs were lost during the second quarter of 2020. In South Africa, the unemployment rate hit an all-time high of 30.8% during the 3rd quarter of 202011. The United Nations Educational, Scientific and Cultural Organization (UNESCO)12reported that over 1.5 billion learners in 165 countries were affected by school closures during the pandemic, with poor learners having inadequate access to data and internet to continue with distance learning.
The pandemic brought a harsh realisation that businesses are not only connected commercially to an economic system. They are also connected through humanity, from workers, to their families and their communities. Business leadership realised that inadequate worker health protection not only endangered direct staff, but wider families and whole communities. As custodians of capital we have a duty to ensure that our investee companies have sustainable business models and that human and worker rights (of customers, employees, health & safety, data security and the communities in which they operate) are adequately assessed, managed and reported on.
Specifically in terms of human and worker rights, OMAI applies the United Nations Guiding Principles on Business and Human Rights, ILO and the International Finance Corporation Performance Standard 2. We encourage all businesses to do the same.
The year 2020 will be remembered worldwide through the lens of the Covid-19 global pandemic. The virus has impacted all parts of our existence; financial and economic systems, healthcare capability, work environment, movement of people, communities and personal lives to mention a few. The media has provided an avalanche of information on how the pandemic has impacted the globe. One aspect of interest from an investment perspective is consideration of an investment’s resilience versus adaptive capability. Scott Nadler has provided an excellent analysis of this in his contribution to the Tomorrow publication and in this podcast. Investments’ increased resilience and adaptive capability will be sought after outcomes from now on.
Last year’s Sustainability Report covered the trend of ESG metric standardisation. We stated that what is needed is ‘an International Financial Reporting Standard (IFRS) for ESG’, naming standard setters that would likely be involved. Well, in the space of one year there have been significant movements in this direction and September 2020 was the month of announcements on the standardisation front. September saw five of the leading standard setters announce a shared vision for a comprehensive corporate reporting system, with a commitment to collaborate to achieve it. The five standard setters include:
This announcement was backed by a paper titled Statement of Intent to Work Together Towards Comprehensive Corporate Reporting
The stated intent of the collaboration is to provide:
The collaboration indicates how these currently separate frameworks could overlap and interlink to form a single reporting framework. The five standards setters also committed to engaging with 'International Organization of Securities Commissions and the IFRS Foundation, including on how to connect sustainability disclosure standards focused on enterprise value creation to Financial GAAP.
The IFRS Foundation published the Consultation Paper on Sustainability Reporting in September 2020, proposing the establishment of a new Sustainability Standards Board (SSB) to sit alongside the IASB under the IFRS Foundation. The objective of the SSB would be to develop and maintain a global set of sustainability reporting standards (initially focused on climate change risks), making use of existing sustainability frameworks and standards (such as CDP, CDSB, GRI, IIRC and SASB). Together, the five already collaborating standard setters with the Task Force on Climate-related Financial Disclosures (TCFD), guide the majority of global sustainability and integrated reporting.
September 2020 also saw the World Economic Forum (WEF) alongside the big four accounting firms (Deloitte, KPMG, EY and PwC) publish the white paper Measuring Stakeholder Capitalism Towards: Common Metrics and Consistent Reporting of Sustainable Value Creation proposing 21 standard core metrics for ESG disclosure, with additional metrics as extensions.,
In March 2021, the World Economic Forum endorsed the IFRS Foundation’s SSB, with members of the WEF supporting the idea of using the existing frameworks as building blocks for a new ESG reporting standard. The IFRS Foundation has subsequently established a working group to accelerate convergence in global sustainability reporting standards and to undertake technical preparation for the proposed SSB. The working group is intended to provide structured engagement with initiatives focused on enterprise value reporting, facilitating consolidation and reducing fragmentation in sustainability reporting standards. Members of the working group include the Financial Stability Board’s TCFD, the Value Reporting Foundation representing the intended merger of the IIRC and SASB, the CDSB, and the WEF. Interestingly, while not announced as members of the working group, the group states it will engage closely with the GRI and CDP.
Source: https://www.weforum.org/agenda/2021/03/yes-esg-is-complicated-together-we-can-simplify-it/
So where to from here? Arguably the most influential player in the space, the IFRS Foundation, has stepped up into a leadership position on the standardisation of ESG reporting. This position has been given further credibility by the backing of the WEF. While still likely a few years off, there is now a real possibility that we may reach a global reporting standard for ESG. Standardisation is therefore clearly being driven forward. But what of ‘consolidation’? Noting the intention of the IFRS Foundation working group to ‘facilitate consolidation and reduce fragmentation of sustainability reporting standards’, the question remains, to what extent will the established standard setters continue to exist? Could the conflicting agenda of organization self-preservation hinder the market need for an IFRS for ESG. Time will tell.