Pandemic Shines a New Light on Climate Change and ESG Investing

The COVID-19 crisis is showing plan sponsors how corporate behaviors affect the environment and that encouraging positive ones with investment dollars can benefit participants as well.

Employers are turning over a green leaf in light of the COVID-19 crisis.

Scientists and environmentalists have reported a drop in daily carbon dioxide emissions as a result of the pandemic, and the connection between the pandemic and its effect on climate change has spurred plan sponsors and companies to support environmental, social and governance (ESG) investing, says Matt Seymour, chief executive officer at RiskFirst. “The pandemic is really going to emphasize the rationale and need for people to look at ESG investments in an integrated and fundamental way,” he notes.

Plan participants have been increasingly interested in sustainable investing in recent years, adds Ed Farrington, head of retirement at Natixis. Socially conscious investors, interested in ESG investment opportunities, had been slowly turning the tide and influencing workplace employers. A 2019 study by American Century Investments showed 90% of defined contribution (DC) plan sponsors who offered, or were considering offering, ESG investments believed it would attract participants. “Participants have instinctively understood that these issues will show up in the price of their securities over time,” Farrington adds. “We have plenty of evidence now suggesting that responsible and sustainable investments belong inside a workplace plan.”

Yet the demand for ESG investing has garnered little implementation in the retirement industry space and, more notably, in DC plans. Investing for a social purpose was long believed to challenge alpha, exchanging a market rate of return for ethics, explains James Rich, a senior portfolio manager on the Sustainable Fixed Income Strategy team at Aegon Asset Management. “There’s this notion that investing sustainably comes at a cost, where you’re putting your ethics above your financial needs, but that’s not the case at all,” he says. “Responsible investing is necessary because the economy is shifting.”

Now, the COVID-19 crisis is altering how the global economy will move toward the future. Market downturns and the economic shutdown set off by the pandemic have ignited new corporate behaviors that can deliver positive effects to the environment, such as issuing green, social and even COVID-19 bonds, said Campe Goodman, a fixed income portfolio manager at Wellington Management, during a sustainable investing roundtable hosted by the company. “What we’ve seen through this crisis is it has accelerated a lot of trends that we have been seeing, and ESG is one of them,” he stated.

The convergence of digital and sustainable investing had been difficult to navigate in past years, but due to stay-at-home orders, businesses are recognizing how both trends can succeed together. The increased use of digital technology and online communication, such as Slack messages and Zoom meetings, emphasizes that people and companies can thrive in lower-carbon environments, Rich says. This effect represents how sustainable investing can withstand the crisis and continue generating alpha. Corporate resiliency, he says, is being redefined. “Employers are generating alpha because they’re investing responsibly, while at the same time having a positive impact on the environment,” he adds. “It’s sort of this holy grail of investing.”

Post-COVID-19, plan sponsors should expect to see an influx of participants interested in sustainable investing, especially given its positive effect on the market, Farrington says. For employers anxious about fiduciary risk, he argues the pandemic and its effect on ESG investing exemplify how sustainable options can lead to greater alpha. “There are material, financial issues, and they need to be taken into account,” he reasons.

Outside of DC employers, pension plans are also being called to apply ESG investment options to their portfolios. These plans have more power in adding ESG practices and can influence investments, Seymour says. Pension plans regularly see themselves as having a socially responsible angle, he adds, and want to do right by their participants and broader community. “It comes down to how pension plans can integrate and align their investment practices with good practices for ESG,” he continues.

Seymour recommends pension plan employers use available data reporting to merge these goals with their plan design, such as investment performance solutions and ESG score rankings. “Some of that is around understanding the mindset, but a lot of comes down to having the tools and data available to do that in an effective and efficient way, so that it doesn’t become an afterthought, it’s actually done as a part of their investment process,” he says.