Responsible investing in 2021: what will be most important E, S or G?

When it comes to responsible investing, the past couple of years have been dominated by the increasing focus on environmental issues and what companies are doing to combat climate change.

But as we approach the end of what has been an exceptional year, has the pandemic changed investor priorities?

We asked eight Elite Rated managers, with ESG at the heart of their process, whether they thought the E, S or G would dominate in 2021. The overwhelming majority believe that social issues will become more prevalent, with six out of eight citing the ‘S’ as a key focus.

Here’s what they had to say:

Jamie Jenkins, co-manager, BMO Responsible Global Equity

“I think that social issues will loom largest in 2021. The Covid-19 pandemic brought about an extraordinary set of circumstances, with entire societies locking down and whole slices of the global economy effectively going into hibernation. The social implications of this will be significant, in terms of health – both mental and physical -, poverty, unemployment, labour conditions, new flexible models of working, technologies which have sprouted up to ameliorate lockdowns, just to name a few. Companies will have to navigate these social issues astutely and ethically, and as investors we will need to be acutely aware of them.”

Simon Clements, co-manager, Liontrust Sustainable Future Global Growth

“Recent circumstances have influenced my answer here and I would say the social side will be increasingly important. Of the three, social has perhaps been the hardest to pin down in the past but, given the seismic changes we have all faced in 2020, we believe people will increasingly reassess exactly what is most important to them as the world recovers from Covid. That might mean family, work-life balance or prioritising experiences over consumerism, and businesses will have to adapt to thrive in whatever new normal ultimately emerges.”

Katherine Kroll, senior sustainable investing specialist at Brown Advisory, told us why social issues have been overlooked in the past in this podcast interview:

Aitken Ross, co-manager, Liontrust Monthly Income Bond

“As a bond investor, my natural instinct is to say governance is always the most important factor when assessing an investment, as ensuring the safety of client capital is paramount. But if 2020 is anything to go by, we can see the growing need for social equality and people being treated better, coupled with a renewed focus on the environment and, more specifically, the climate crisis. Without sounding like I’m sitting on the fence; I believe all three will be equally as important and that serves as a clear demonstration of why ESG will be so key as the world recovers from Covid-19.”

Noelle Cazalis, co-manager, Rathbone Ethical Bond

“I think the ‘S’ will be the dominating theme in 2021 for obvious reasons: fighting the health crisis. So far this year, the social bond market grew by 75%, and I can see a similar growth rate next year to finance the response to the pandemic and its economic consequences. Issuers now see green bonds as a credible funding tool, and I think social bonds will follow the same path.”

Noelle spoke about green, social and blue bonds in this recent video:

“That said,” Noelle continued, “the ‘E’ remains crucial, and I think will be at the forefront of many management teams’ thoughts, with the EU green deal and the UK committing to a ‘green revolution’ amongst others. So, I believe our investment universe for climate and environmental projects is going to continue to grow next year.”

Deirdre Cooper, co-manager, Ninety One Global Environment

“As an investor, I think you have a better chance of success if you understand a company in the context of all of its stakeholders – so E, S and G issues will all continue to be important. But I think the pandemic has put the spotlight on environmental and social issues especially.

“With lives and livelihoods at stake, it is a matter of survival for companies to retain the confidence of customers, staff, supply-chain partners and communities – so they need to be strong ‘S’ (social) performers. And counter to expectations, COVID has accelerated the drive for environmental sustainability in many sectors, not least because a number of governments have put clean-energy at the heart of their post-pandemic recovery programmes. Consequently, ‘E’ (environmental) performance is being watched even more closely.”

Luciano Diana, co-manager, Pictet Global Environmental Opportunities

“For 2021, we expect environmental factors to gain influence on investment decisions. Policy responses to the pandemic are beginning to place stronger emphasis on environmental outcomes and the European Green Deal is the prime example.

“However, we are also witnessing a greater appreciation for the link between environmental degradation and health outcomes. Examples include evidence that higher air pollution has been associated with higher COVID19 mortality or the view that deforestation makes animal-to-human viral transmission more likely.

“An emerging focus on the value of biodiversity is also noticeable both in policy-making and investment circles. As these narratives gather steam, so will their relevance for investors, both from a risk and opportunity perspective.”

David Harrison, manager, Rathbone Global Sustainability

“One aspect of the ‘E’ could be very important in 2021. As governments around the world embark on significant fiscal stimulus, we are seeing an increasing focus on green infrastructure projects. We have already seen this in Europe with the recovery deal, and in China too. The US could follow post- election.

“We think this will have a sustained impact on renewable energy investment – wind, solar and hydrogen in particular. We could also see more of a focus on circular economy initiatives to reduce plastic waste and an acceleration in electric vehicle investment. This creates significant investment opportunities across a number of global sectors.”

Ketan Patel, co-manager, EdenTree Amity UK

“The pandemic has led to increased interest in the ‘S’ in ESG, with more focus on social justice and inequality. Whilst the ‘E’ has always garnered most of the headlines, investors are now challenging companies to show leadership on the social front encompassing diversity, supply chain operations and labour relations.

“But it is actually via the ‘G’ – and in particular proxy voting – that active managers are best able to engage and influence company management on delivering on these broader environmental and social goals.”