Argument

COVID-19 Made Sustainable Investments Go Viral

The pandemic has proved the viability of ESG metrics, and the business world may be changed for good.

Climate change protesters block traffic during a protest to shut down Washington, on Sept. 23, 2019.
Climate change protesters block traffic during a protest to shut down Washington, on Sept. 23, 2019. Mark Wilson/Getty Images

Before COVID-19 took the world in its grip a year ago, the tailwinds behind the global sustainability movement were already pushing its skeptics into a corner. Global finance’s emphasis on environmental, social, and governance (ESG) criteria as a means of valuing companies, real estate, and investment performances was going mainstream, with climate risks being adopted by insurers, regulators eying the gender and racial makeup of corporate boards, and skeptics sounding a lot like those who once insisted the moon was made of Swiss cheese.

Studies consistently showed portfolios heavy with firms that scored well on sustainability metrics were outperforming expectations. Most of all, the historic and ongoing transfer of wealth from values-neutral boomer parents to Generation X and millennial children saw capital piling into ESG funds, validating sustainability goals as a means of sorting the good from the bad in society, not just on ethical and moral grounds but in terms of investor returns as well.

The devastating global pandemic’s emergence last winter raised questions about all this. Could the world afford, in the face of lockdowns and economic downturn, to prioritize anything other than raw profit? Some argued “no,” among them former U.S. President Donald Trump’s Labor Secretary Eugene Scalia, who took steps to bar ESG as a factor in retirement planning. Trump’s Securities and Exchange Commission (SEC) and Scalia’s Labor Department fought to reverse efforts to encourage wealth managers and other financial advisors to offer ESG as an investment strategy. An investment advisor’s duty, Scalia wrote in the Wall Street Journal, is to maximize returns alone because “one ‘social’ goal trumps all others—retirement security for American workers.”

As the world starts to emerge from the pandemic, it’s now clear those efforts were a rearguard action by guardians of 20th-century values, and that action has failed. The idea that shareholder returns were the only things that mattered in market economics—most famously championed by Chicago School of Economics icon Milton Friedman—is being widely repudiated, replaced by a stakeholder approach that gives new weight to the interests of employees, customers, the broader society, and, well, the survival of the planet.


Defying the naysayers, capital flowing into ESG funds—investment vehicles that attempt to avoid investing in corporations that score poorly on the array of metrics that measure what used to be called “corporate citizenship”—more than doubled during the pandemic year. In the United States alone (which trails behind Europe in ESG adoption), ESG-rated funds took in $51.1 billion in new investments, according to financial sector data firm Morningstar. It was the fifth year in a row of significant growth. Perhaps more notably, these investments accounted for more than 25 percent of all money invested in U.S. stock and bond mutual funds during the year. That’s up from just about 1 percent of all such flows in 2014.

ESG investing came into the pandemic with a full head of steam, but its dramatic growth during 2020 vanquished lingering skepticism. It also reflects some of the lessons of the COVID-19 trauma: Companies that embraced ESG’s social component ­would come through the crisis stronger.

And in fact, that’s precisely what happened.

“Overall, it was an impressive year for sustainable funds,” wrote Jon Hale, who runs Morningstar’s sustainability research. “In 2020, three out of four sustainable equity funds beat their Morningstar Category average, and 25 of 26 ESG equity index funds that I’ve been following this year beat index funds tracking the most common traditional benchmarks in their categories.”


Prior to the pandemic, those not steeped in the sustainability movement often equated ESG almost entirely with the “E” or environmental factors: a focus on issues like energy and water use, carbon footprints, and waste management. Gender and racial diversity mattered too, as well as CEO pay (all aspects of a company’s governance rating). By and large though, before the pandemic, ESG was treated as a standing for “greenness.”

But “the questions we’re being asked today are very different than they were in 2019, when most seemed to be focused on having women in the boardroom and minimizing climate impact,” said Michael Scanlon, a managing director and head of the sustainability practice at Silver Leaf Partners in New York. “Now it’s very much about the wellness of people, the employer-employee relationship, all added to those previous environmental and diversity issues.”

This is having a profound effect on the course many industries are charting to emerge from the pandemic. The new focus on air quality that people breath in a building is one example. Efforts to mitigate the risk of infections have also uncovered truths about the threat that poorly managed humidity, temperature, air flow, and carbon dioxide buildup pose even in so-called “normal” times.

The duty-of-care that companies should feel for employees—or customers, tenants, and subcontractors—is also being newly scrutinized. Can a firm that decides against requiring masks on its premises be sued for a COVID-19-related death? Does a return to the office that mixes vaccinated and non-vaccinated workers raise similar liabilities? Viewed through the lens of ESG, strict adherence to what’s legal may not clear the hurdle of what’s ethical. And that has given labor new leverage in its relationship with management everywhere.

Similarly, the decision by many firms to make hybrid workplaces and flex time a permanent feature of the post-COVID-19 future reflects more than a desire to get expensive real estate off their balance sheets. Studies, including one by Deloitte, drive home what most people have intuited: For varying reasons, the pandemic has disproportionately hurt low-income families, minority groups, and women. Providing flexibility is one way to help mitigate these effects.


At the same time, regulators have now joined the fray, from local jurisdictions like Stockholm, Oregon, and New York, to supranational ones like the European Union, which often sets the tune for global regulation. In early March, the SEC, a regulator of markets, established a commission to promulgate tighter corporate disclosure rules and hired its first senior advisor for ESG issues.

Also this month, a new EU law setting standards for the transparency and accuracy of claims made by “green financial vehicles” like ESG funds went into effect, with steep fines looming starting in 2022 for those who “greenwash,” that is, make false claims about the sustainability of their offerings.

Two important results will flow from this new rule. First, it will spread. As with many regulatory issues, the EU, by dint of its size, can dictate standards to anyone doing business within its borders: Chinese, American, Japanese, or otherwise. Already, New York City is requiring building operators more than 25,000 square feet—the equivalent of a medium-sized apartment building—will be subject to emissions standards and must display ratings grades in their lobbies. Real estate industry analysts estimate that for some of the city’s larger buildings, if they don’t spend money on expensive retrofitting, fines will top $1 million annually.

Second, the EU law will flow downward from banks that hold stocks and ownership stakes in corporations or exchange traded funds and real estate investment trusts to the managers of those entities, who will now be hit with demands for broader and more empirical data on their own sustainability profiles.

Take the commercial real estate sector. Globally, giant financial companies like BlackRock and State Street—as well as pension funds, investment banks, and sovereign wealth funds (SWF)—own about 69 percent of all commercial real estate. Already some of these are actively agitating for more ESG-friendly performances from companies they invest in. Now, however, the pressure will be on any company whose major shareholders are subject to the EU green finance law.

On top of questions about energy use and board diversity, building owners will be asked if they maintain a safe environment for tenants and customers. Do they provide transparent, anonymous ways for occupants to register concerns? Do leaks and broken fixtures get addressed quickly? From ventilation to the cleanliness of elevators, restrooms, and common areas, COVID-19 has supercharged the ESG movement with regard to the social aspects of real estate.


This new, more balanced appreciation for what ESG means could be a passing phase, of course: a kind of hangover from the COVID-19 period. Yet as Friedman’s acolytes like to say, “money talks,” and that conversation is having an impact in the strangest places these days.

Take ExxonMobil. For much of the first part of this century, the oil giant was the poster child of denial—walking a carefully crafted noncommittal line on climate change in public while happily funding research and lobbying efforts that appeal to the “drill, baby, drill” crowd. As recently as May 2015, Rex Tillerson, then-CEO of ExxonMobil, told his shareholders’ meeting that “our ability to project with any degree of certainty the future is continuing to be very limited. If you examine the temperature record of the last decade, it really hasn’t change.” In other words, nothing to see here.

That was then. Today, Tillerson is gone. Exxon/Mobil, like many of its competitors, has been besieged by divestment and activist investors demanding it diversifies away from carbon and stops funding climate denial groups. In late January, the company acknowledged it would make board changes and fund sustainability research under pressure from activist shareholders.

That’s not to say ExxonMobil is about to put someone from the Sierra Club on its board. But it has dawned on the company’s shareholders that the vast oil and shale reserves the company uses to justify its share price may turn out to be “stranded assets,” that is, assets of dubious value in a world moving steadily away from carbon energy. In January, the SEC opened a probe of allegedly overinflated ExxonMobil claims about the company’s holding in the Permian Basin shale fields.

Yet even ExxonMobil is taking ESG all more seriously these days. In the company’s most recent ESG statement, Darren Woods, the company’s chairperson and CEO, touts its “commitment to responsibly and sustainably running our businesses” and an intention to “continue to invest in lower-emission technologies, such as carbon capture and advanced biofuels, which are necessary for society to achieve its ambition for net zero emissions by 2050.”

Greenwashing? Almost certainly. But the fact it is even trying is a sign of things to come.

Michael Moran is an author on political risk and macroeconomic trends.

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