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The impact of COVID-19 on sustainable investing

+ Insights from Leon Saunders Calvert (Head of Sustainable Investing, London Stock Exchange Group)

Environmental, Social and Governance criteria (ESG) can be briefly described as the three central factors that make up the sustainability of a company or business. Most institutional investors now assess the ESG criteria of a company in deciding whether to make an investment. It is a great way for investors to show their values while encouraging companies to take into consideration the wider impact of their actions (be it socially or environmentally) and to review their governance as well as transparency policies. The trend of ESG-led investing has been rapidly growing in the last few years. When the COVID -19 pandemic struck, there was a concern that it would shift attention away from sustainable investing which was something of a luxury for ‘good’ times.

 But whilst some argue that the pandemic has forced businesses to focus on the consequences of the health crisis, with little time to think about sustainable practices, many more believe that the pandemic will boost sustainable investment as a result of many governments using this crisis as an opportunity to “build back better”. According to J.P. Morgan, COVID-19 has brought the greatest recession since World War II. Investors are calling it the 21st century’s first “sustainability crisis”. This is because many are seeing the economic impacts of the pandemic as a “wake up call” that calls for a different, more sustainable approach to investing. Recent figures suggest that this is true. Data from Morningstar shows that flows into European ESG funds have reached an all-time high, attracting 52.6 billion pounds during the Q3 of 2020 and helping to grow overall assets across ESG funds to a record of 882 billion pounds. According to the Financial News, the COVID pandemic has also shown that companies with strong ESG ratings have performed better this year, and as a result investors are more likely to invest in them.

The pandemic has impacted all three of ESG sectors though to different extent. A study sponsored by a news outlet “International Investment” in 2020 revealed that environmental issues remain the most important consideration for investors. When asked to rank ESG factors, nearly half of the respondents in the survey (46%) said they believe environmental factors are the most important, with just 34% citing governance, and the remaining 20% for social issues.


The pandemic resulted in an international collaboration and huge global effort to control the consequences of the outbreak. This begs the question: if we can change our behaviour to fight a viral pandemic so drastically, can we do the same to avert a climate disaster?

COVID-19 is likely to increase international awareness and global action to tackle high risk issues such as climate change and loss of biodiversity. This is because many parallels have been drawn between the unforeseen consequences of the pandemic and those of climate change. According to J.P. Morgan many investors believe that a global pandemic and environmental risks are viewed as similar in terms of impact. Furthermore, a J.P. Morgan asset management poll of 50 global institutions found that 71% of the polled institutions claim that an event like COVID-19 was likely to lead to an increase in actions designed to tackle risks such as those related to climate change and biodiversity loss. The virus has made many companies realise that they can no longer operate independently of societal and environmental issues, as these present clear financial risks.

However, there are those who are concerned about companies focusing their efforts on the environmental agenda, saying that the issues presented by it are too difficult to deal with in the middle of a health and economic crises. Additionally, for now, most governments have been responding to COVID-19 by prioritising social and economic considerations over the environment. However, it is generally accepted  that environmental risks cannot be ignored indefinitely as the results are likely to be catastrophic. According to the World Health Organisation, climate change and loss of biodiversity are expected to drive changes in infectious disease transmission patterns, with climate change and biodiversity loss increasing the risk of future pandemics. The World Economic Forum Risk Outlook also highlighted the importance of tackling the climate crisis as soon as possible, flagging the failure to act upon climate action and biodiversity loss among the most significant risks to be aware of in the coming years. They highlight that if we fail to address these, the impacts could be far larger than the ones caused by the pandemic. Recent estimates from contributors to the intergovernmental panel on climate change suggests that inability  to address carbon emissions could cost between $149 and $791 trillion by the turn of the century. That far exceeds losses expected from COVID-19 which are predicted to exceed $21 trillion pounds according to the International Monetary Fund in November 2020. Moreover, according to Al Jazeera news, every dollar invested to prevent an environmental disaster will save the equivalent of 17 dollars required to deal with the effects of climate change and biodiversity loss in the future – making it significantly more sustainable to prevent a climate crisis as soon as possible. Antje Stobbe (Senior ESG Analyst at Allianz Global Investors) believes that the “focus on ESG will clearly accelerate”, and COVID has shown us this is not just a health crisis. “Awareness among company leaders has risen and they need to think more about systemic risk. Climate is one of those systemic risks”.

Amra Balic, Head of Investment Stewardship for EMEA at Black Rock, the world’s largest asset manager says that the focus of sustainable investing is likely to remain on climate and environmental matters. However, COVID-19 has also boosted the attention to social considerations.


Prior to the pandemic, climate change and environmental concerns had dominated the ESG discussion. While the pandemic has boosted these considerations, it has also shifted some of the ESG focus to social factors. Companies have been asked to consider the welfare of their employees and customers in ways unimaginable just a year ago. This is because the pandemic has increased investors’ focus on how companies manage social issues in particular. In the early stages of the crisis, shareholders urged company bosses to focus on employee well-being and on ensuring that suppliers were paid during global lockdowns. COVID-19 has put human capital under the spotlight. Consequently, issues such as employee contracts and rights have come to the forefront as investors and the public scrutinise how businesses act during the crisis. Considering  many workers were left with little protection (both financial and health), it is more than expected that post-COVID-19, companies will receive increasing pressure to improve social considerations. This stance was seen by many as an indication of a greater focus on the “S” in ESG. Balic from Black Rock says that “S has definitely come to the forefront”. The rise of attention to social considerations within companies has also highlighted the social inequality that exists within many businesses, and the public is now putting increasing pressure on companies to address these. Bank of America, Sephora and Nike are among the companies that have either formed task forces to address racial inequality or pledged support for Black-owned businesses in 2020. 

Following the pandemic, the EU took legislative measures to promote investment into companies that are demonstrating not only social and environmental but also governance priorities.


In light of the pandemic, governing issues are just as important. Companies that better manage ESG risks are likely to be more resilient throughout the crisis. For example, if they have invested time and effort in addressing supply chain risks, they are a lot more likely to be in a better position to manage disruptions caused by restrictions.

When we look across the industry, there are significant differences between companies that have clear contingency plans as well as monitoring in place and those who don’t. According to Hermes Investment, companies with the highest rated governance scores have on average outperformed the lowest ranked companies in the first six months of 2020. This information highlights the importance of good governance. It differentiates the companies that understand material risks and are taking appropriate steps to mitigate them from those who don’t. Furthermore, it accentuates that a company’s readiness to contend with emerging as well as strategic risks and opportunities enables it to be sustainable long-term.

The considerations above suggest that COVID-19 has advanced all 3 aspects of ESG criteria. However, despite the evidence, it is worth noting that it is impossible to say with absolute confidence if COVID-19 has positively affected sustainable investment. We are still in the midst of the pandemic and as such have to wait and see whether decision makers will prioritise sustainable initiatives as economies move into the recovery phase post-coronavirus.

Insights from Leon Saunders Calvert

In order to gain additional perspective on the topic, I contacted Leon Saunders Cavert (head of sustainable investing, London Stock Exchange Group) who kindly agreed to share his insights.

Leon believes there are four main takeaways from the COVID-19 crisis.

  1.  You have to, wherever you can, quantify and internalise externalities (environmental, social, humanitarian). When you can quantify and internalise those, then you can manage risk better. The pandemic has demonstrated with a degree of clarity that major social and environmental crises cannot be divested away from. For example, if a company could have predicted prior to the pandemic (say, October 2019) what was going to happen, it would have made some decisions about their business differently in order to prepare it for the impacts of the pandemic. While in the case of the pandemic, the timing and scale of it was surprising, the idea that a pandemic was coming should not have been surprising. There are major crises, such as the climate crisis, which are in some ways much easier to predict – as we understand the science behind it quite well. So why would we not internalise that, especially given the level of disruption that it might cause?
  2. The second point, while different from the first, is equally important. The pandemic has shown an immense disruption to individuals’ freedoms across the world, as well as a massive disruption to international macro-economic growth. Despite these considerations, all indications suggest that carbon emissions were decreased by around only 5%. There is a very important lesson to learn here, one that not many people have taken away: doing less is not an appropriate answer. We cannot solve the climate crisis by just doing a bit less. We did an enormous amount less last year – which had gigantic implications on people’s livelihoods and on the economy – and we only managed to decrease carbon emissions by 5%. The Paris agreement requires emissions to be decreased by 7%, cumulatively, year over year, for the next decade. The answer has to be something different to that: there has got to be a mass mobilisation of capital towards deep decarbonisation, and a massive change of business models, to those which are conducive of a low-carbon economy. We need to do more with technology, more research and development, more investment, more economic stimulus, more focus on science and on innovation – there needs to be more of the right things. Economic de-growth will not solve the problem.
  3. The pandemic brought more attention to the S of ESG. In addition to the social issues highlighted by the pandemic, there was also this enormous social movement taking place around the world – particularly in the US – on Black Lives Matter. These factors increased the focus on the “S” of ESG, but not at the expense of the “E”. This means that there is an intention of internalising the S as much as we already do the E.
  4. There has been an increase in capital flow of money into ESG funds. These funds have outperformed generic funds over the course of the last year. While this means that there is an investor and consumer appetite for ESG focus, ESG investment should have a long-term focus, hence, how it performs in the short-term is a lot less important.

COVID- 19 has profoundly affected the way that all of us lead our lives. It has highlighted the vulnerability of our economy. There has been a recognition that a more sustainable economic system will be more resilient to COVID – 19 (in all its mutant forms) and for future pandemics and any other challenges that we will face in the future.

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