While the coronavirus continues to cause heartbreaking loss and economic devastation across the world, there has been one special beneficiary of global quarantines – the environment. The worldwide lockdown had led to a dramatic decline in air pollution levels compared to previous years, and significant decreases in carbon dioxide emissions. Some scientists are currently researching whether there is a correlation between air pollution levels and higher reported coronavirus cases, while others are researching whether deforestation and destruction of natural habitats of species contributed to the spread of new viruses (due to the forced immigration of those species).
While some argue the coronavirus pandemic could be viewed as a warning sign as to how a climate crisis might affect everyday lives, others see it as an example of the importance of a global collaboration and accountability where the acts of each individual matters in the war to defeat a global threat. Meanwhile, before the coronavirus pandemic era began, a new trend has been emerging in the corporate and investor worlds that focuses on the collective effort to address environmental and social issues such as climate change.
In January 2020, in an annual letter to corporate executives, BlackRock CEO, Larry Fink, said that “climate change has become a defining factor in companies’ long-term prospects”. “Awareness is rapidly changing” said Fink in his letter, “and I believe we are on the edge of a fundamental reshaping of finance.” “While government must lead the way in this transition, companies and investors also have a meaningful role to play.”
BlackRock, with over $7.4 trillion assets under management has, among others, been integrating environmental, social, and governance (ESG) data and insights into its investment process. Along with BlackRock, many other leading investment managers and publicly traded companies have been adopting ESG tools, such as the CalPERS public employee retirement fund, which has a market value of more than $390 billion.
What is ESG? For one, it is much more than just about the environment. It includes, for example, a corporation’s commitment to social matters such as diversity and equality in hiring practices, gender pay gap and the health and welfare of its employees. Other examples include the maintenance of a sustainable supply chain and a disaster preparedness plan. When incorporated into an analytical framework, ESG factors are used by investors to assess a company’s long-term financial viability (based on certain ESG criteria). The goal of companies that adopt ESG strategy is to mitigate risk (including financial risk) that may have otherwise been overlooked. There are a number of sustainability reporting frameworks used by companies and investors, such as the GRI standards (Global Reporting Initiative) and the SASB standards (Sustainability Accounting Standards Board), amongst others. With the help of a consultant, companies may evaluate and determine which reporting framework is most suitable for its industry, corporate culture, geographical operations, and other factors.
However, it is not just about risk, as proactive actions on ESG issues could contribute to companies’ and investors’ financial return. According to a January 2020 report by Morningstar Inc., sustainable funds in the U.S. attracted new assets at a record pace in 2019 – $20.6 billion in 2019, compared to $5.4 billion in 2018. While there is clearly a growing adoption of ESG tools, time will tell whether investors will require companies to adopt ESG practices as many companies struggle to emerge from the economic crisis or whether investors decide that such a mandate would be an impediment to their recovery. But whether to a greater or to a lesser extent, it seems the ESG is here to stay.
Innovative Israeli companies are at the forefront of sustainability in industries such as e-mobility, agriculture and food, building management, materials, air quality, water treatment, and renewable energy. Similarly, leading Israeli VC funds in these industries may want their portfolio companies to demonstrate a commitment to ESG issues (which may also yield an increased financial return). Alternatively, leading Israeli companies seeking U.S. investment should pay attention to capital sources that are adopting ESG assessment strategies. In any scenario, corporate accountability for ESG decisions may be more important than ever in the post-coronavirus era, and companies and investors around the world should consider learning more about the various standards and strategies shaping the ESG movement.