The movement of sustainable finance into the mainstream of capital markets has progressed even further than before in the last 12 months. But there is a conflicting development: market participants have also had to navigate the unprecedented challenge of a global pandemic.

Inevitably, this colours their stances — particularly among investors, whose strategies have been tested severely by market gyrations for much of 2020.

These trends stand out strongly in our annual Sustainable Financing and Investing Survey, which this year covers 1,000 capital markets issuers and 1,000 investors.

Focus on performance

The interaction of these two influences — growing interest in sustainable finance and navigating the pandemic — is evident in investors’ greater focus on investment performance. While they are increasingly adopting responsible investing policies and considering environmental, social and governance factors, they have also become notably more focused on risk and return.

This has both positive and negative implications for their stances on ESG investing. Asked why they care about environmental and social (E&S) issues, the most popular reason given by investors, at 49%, is the possibility that ‘it can improve investment returns or reduce risk’. Other reasons such as the wishes of stakeholders and their own values have fallen behind risk/return as a driver. There is also still a very substantial consensus among investors that E&S issues are important. A total of 86% regard them as very or somewhat important.

However, this has declined slightly from 94% a year ago. The ‘very important’ measure has fallen quite significantly from 64% to 48%. Moreover, the proportion regarding E&S as not very important has risen notably to 8.5% from 2019’s 1.5%. These responses may show that for a minority of investors, the acute experience of trying to keep earning an investment return during the very tough market conditions of 2020 has made them pay less attention to E&S.

That interpretation is borne out by the direct question we asked investors and issuers about how the pandemic had affected their attitudes to sustainability (see ‘Coping in the time of COVID’ below).

Although 49% of investors say they care about E&S because it holds the possibility of improving returns, as every investor knows, success is never guaranteed.

As in 2019, we asked investors to describe their expectations about how practising ESG and responsible investing would affect risk and returns. The answers suggest a rise in consciousness of risk — understandable, after a very volatile period in markets for investors of all kinds. However, 41% say ESG has ‘a good chance of generating outperformance’ or ‘is an attractive way of trying to generate outperformance’.

Capital markets issuers tell a less dramatic story. Confirming their reports that the experience of COVID-19 has made sustainability more relevant to them, a higher proportion now reports E&S as very important: 62%, up from 58% last year.

Overall, 93% of issuers say they see these issues as important. This is unchanged from last year, as is the proportion regarding E&S as unimportant (3.5%).

“Inevitably, this colours their stances — particularly among investors, whose strategies have been tested severely by market gyrations for much of 2020”
Coping in the time of COVID

We also asked issuers and investors specific questions about how the pandemic has affected their approaches to sustainability and ESG issues. The answers make clear that this experience has had a huge influence — and for most, it has pushed sustainability up the agenda.

Among both issuers and investors, more than three quarters (see graph) have been driven to engage with sustainability in new ways. Very significant numbers — 38% of issuers and 23% of investors — are now paying more attention to social welfare and the social component of ESG. But the largest groups — 29% of investors and 41% of issuers — say the pandemic has reinforced their commitment to sustainability and ESG. A quarter (24%) of investors have reconsidered the ways they approach ESG, though this proportion declines in larger institutions and is much less true of pension funds than other categories of investors such as asset managers and insurance companies.

By contrast, only 12% of issuers say the pandemic has not made much difference to their approach to sustainability; 13% of investors say the disease has not affected how they consider ESG issues when they invest. All the rest have changed their views in some way. Only 2% of issuers and 1% of investors say they are placing less importance on these matters permanently as a result of COVID-19. Higher proportions (9% of investors, 12% of issuers) have focused less on these issues temporarily as they coped with more immediate challenges.