‘major turning point’ for responsible ESG investing, says JPMorgan

The coronavirus pandemic and the destruction left in its wake could lead to a greater adoption of socially responsible investing, according to JPMorgan.

In a report released Wednesday, the firm said that Covid-19 could prove to be a “major turning point for ESG,” which is when investors consider a company’s environmental, social and governance factors alongside traditional metrics like balance sheet strength and earnings growth potential. 

“The COVID-19 crisis has not only brought on the greatest recession since World War II, but investors are also calling it the 21st century’s first “sustainability” crisis and one that has renewed the focus on climate change, acting as a wake-up call for decision makers to prioritize a more sustainable approach to investment,” wrote JPMorgan’s co-heads of sustainability research Jean-Xavier Hecker and Hugo Dubourg.

The firm surveyed investors around the world totaling nearly $13 trillion in assets under management and found that more than 70{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} believe unforeseen events like Covid-19 will spark investor interest over tackling issues like the climate crisis. And more than 50{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} said the pandemic would be positive for ESG momentum over the next three years. Of the respondents, 18{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} said they believe Covid-19 will be neutral for ESG investing.

“We believe that pandemics and environmental risks are viewed as similar in terms of impact, representing an important wake-up call for decision makers,” said Hecker and Dubourg. “The impacts of the COVID-19 crisis on the real economy and the financial system highlight the limits of most forecasting models, which do not deal well with non-linear, complex systemic risks.”

Sustainability-focused funds attracted a record amount of capital in the first quarter of this year, even as the pandemic rattled worldwide markets. Global sustainable funds saw inflows of $45.7 billion, while the broader fund universe had an outflow of $384.7 billion, according to Morningstar.

In the U.S., sustainable funds saw a record $10.5 billion of inflows in the first quarter, although the pace of buying did slow by March.

But with investor momentum now returning to the market, 2020 is on track to be another record year for sustainable funds. In fact, inflows in the first quarter were more than half of the record $21.4 billion pumped into sustainable funds in 2019.

ESG investing in the broadest sense is set to encapsulate $45 trillion in total assets by the end of the year, according to JPMorgan, with more than 90{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} of that concentrated in Europe and North America.

“While ‘tipping-point’ has been used to characterize this market for almost as long as it has existed, we do believe a substantial shift is under way: stakeholders are increasingly pricing in sustainability preferences, which should lead to a reconciliation of ‘sustainable’ and ‘financial’ materiality over the long-term,” the report said.

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