Key Sustainability trends
Amid the disruption of 2020, we can reflect on a landmark year that catalysed the mainstreaming and maturing of responsible investment practices and a move towards greater focus on sustainable outcomes. While ESG was once seen as a niche area, now nine in ten companies in the S&P 500 index produce sustainability reports6 and investors managing over $100 trillion have signed up to the UN-backed Principles for Responsible Investment.
Thus, while the global response to coronavirus dominated markets and everyday life last year, it was not the only significant trend to reflect on. Exactly five years after they were both agreed, there was notable progress in how the markets are aligning with the Paris Climate Accord and the Sustainable Development Goals. There was also significant movement as the EU turned its rhetoric on sustainable finance into regulation.
Here we reflect on how these four trends shaped markets last year, and the following pages show how Kempen responded to these trends.
Trend 1: The pandemic creates a year like no other
From apparel to aviation, no sector was insulated from Covid-19.
Early on, there was concern that corporate progress on environmental and social factors would be one of the victims of the pandemic, but in many cases it has been encouraging to see the opposite response. Many of our investee companies and clients were forced to consider the need to build resilience to mitigate and adapt to non-financial shocks.
In the face of the pandemic, the evidence showed that sustainable investments have a greater resilience to external shocks, whether due to, for example, lower exposure to fossil fuels in ESG portfolios, better corporate governance generally, or simply having a longer term outlook. In Q1, as the impact of the pandemic was shaking markets worldwide, one study showed that 88% of sustainable indices were outperforming their non-sustainable counterparts7. Later in June, MorningStar found that a sample of 745 sustainable European fund strategies had outperformed non-ESG funds over one, three, five and ten years8.
While the human tragedy of the pandemic must be the clear focus, it is notable that Covid-19 has made a compelling case for responsible investment, including the often overlooked ‘S’ element of ESG. Companies had to increasingly think about health and safety of their employees, customers and suppliers. Furthermore, as pandemic continues companies increasingly realise they need to take measures to boost mental health and well-being of their workers.
Read about Kempen’s response to Covid-19 here.
Trend 2: Responding to climate change
As much of the world was put on hold, climate change never paused. The UN estimated last year that global emissions must fall at least 7.6% every year to 20309 to limit global warming to 1.5 ᵒC.
Lockdowns across the world resulted in a reduction in carbon emissions at the start of the pandemic, but these have been steadily climbing up once again when industrial activity returned. A more modal shift may well prove to be the number of commitments to net zero made by both states and corporations in 2020, including the world’s largest CO2 emitter, China. The announcement that the US re-joined the Paris Agreement should also prove significant.
This led the markets to fire the starting gun on the race to net zero in 2020, in large part thanks to initiatives like the Net Zero Investment Framework for investors, launched by the Institutional Investors Group on Climate Change (IIGCC). It is among the first practical blueprints to enable both asset owners and asset managers to access methodologies and metrics required to become ‘net zero investors’.
Furthermore, mandatory TCFD reporting is becoming normalised within financial sectors. Economic relief and pandemic recovery programmes will channel vast sums of capital into green projects, while clean energy has never been cheaper, and carbon prices never higher. More corporate behemoths are throwing their weight behind the transition and it is perhaps significant that over 1,000 companies have now committed to tough, science-based targets for emissions reductions.
As the world prepares for the make-or-break UN COP26 climate negotiations in 2021 the private sector provides positive tailwind for these.
Kempen’s progress on meeting the climate challenge in 2020 is described here.
Trend 3: The EU sustainable finance wave lands
Two years ago, the European Union (EU) embarked upon a major transition towards a lower carbon future, with its Action Plan for Financing Sustainable Growth. In 2020 we saw this work bear fruit as implementation of two key areas – the EU Taxonomy Regulation and the Sustainable Finance Disclosure Regulation (SFDR) – was approaching.
This is forcing many market players in Europe to improve the way they manage and report on sustainability risks and reinforcing the global leadership that Europe is taking on climate and sustainable finance. It is perhaps no surprise that an analysis to determine ‘how green’ the post-Covid stimulus packages of developed economies was found that the ‘Next Generation EU’ recovery package is the most environmentally friendly of all10.
The approval of the EU taxonomy in particular broke new ground in 2020. In such a large market as the EU, and with such a wide variety of active and passive products, many investors lacked the necessary information to understand whether these financial products had a genuinely positive impact or were ‘greenwashing.’ The EU taxonomy aims to harmonise understanding and clarify which investments can correctly be described as ‘green’, ‘low-carbon’, and ‘Paris aligned’.
Despite open questions and some uncertainty around it, the EU’s set of sustainable regulation is still some way ahead of other regions, especially the US. In part this is because Europe had $1 trillion of assets under management in sustainable funds, compared with $179 billion in the US according to MorningStar11. This macro trend is might shift in the coming years with the impetus of the new US administration that will try and close the gap between the US and Europe.
Read here how Kempen has been staying ahead of the EU regulation.
Trend 4: Getting granular with the SDGs
Since they were created five years ago, the UN has always trumpeted the SDGs as more of a universal call to action than a precise framework by which their 17 laudable ambitions can be achieved.
What has been encouraging however, particularly in the last year, has been a trend towards more precise disclosure by companies on how they are contributing to the UN goals. This in turn will enable investors like Kempen to eventually benefit from higher quality data on SDG impacts.
Last year marked the start of the UN ‘Decade of Action’ to deliver the SDGs by 2030. In the wake of the setbacks the Covid-19 crisis has posed to achieving may critical SDGs, better measurement of precisely how companies and investors contribute to relevant SDGs is likely to become increasingly prominent.
Read here more about Kempen’s actions to align to the SDGs.
10. Green Stimulus Index report, Dec 2020