Acceleration of ESG Through a Crisis

As we enter the global recovery post-crisis, global governments and businesses are under pressure to promote a sustainable recovery which addresses ESG and sustainability issues.

In a recent in-depth IHS Markit research paper we argue that any sustainable, "green recovery" can only happen with an acceleration of ESG, one where we believe that capital markets and society will be the driving force.

ESG impacts pre-crisis and post crisis were collated across the following IHS Markit business units: Economic, Country and Risk; Maritime and trade; Agriculture, Energy, Agriculture, Automotive and Finance.

Post crisis, we expect to see a significant re-set of ESG expectations across the following areas: products, technology, new business models, supply chain, the role of government, and the role of the investor. In the paper, we identify specific ESG impacts within these areas and across IHS Markit business units and we explore them in the context of sustainable finance and mandatory and voluntary responsible business frameworks.

1. For Companies are looking to adapt to the new ESG expectations and build resilience, we posit that new business models with systemic change attributes able to deliver social benefit and promote circularity in resource use will be a winner with the capital market. Evidence of positive alpha benefits with investments with an ESG dimension are well established and known. ESG as a risk barometer and a competitive advantage identifier are well documented beyond the paper. As the capital market rewards companies for embedding ESG in its business strategies, how is government responding?
2. Global governments have addressed the health crisis but now have an economic crisis to manage. We argue that global governments will be slow to deploy the necessary climate change mitigation action and the opportunity to recover sustainably via this route will be missed. Our analysis of government pandemic recession response strategies in select G20 countries supports this view.
3. We believe the real energy transition ie. a significant move away from fossil fuels globally is likely to start in 2030. With this in mind and looking to 2021, the clean tech industry and green shipping transition are in full flow. Capital allocation is at a steady and growing level. We note an uptick in investor interest and a closer consideration of ESG impacts in the shipping industry investment profile and an awareness of shipping industry ESG impacts which will become more visible in value chain assessments other dependent industries. The Maritime and trade industry has a key role to play in the energy transition and achieving the global sustainability goals. We expect more attention in this area moving forward.
4. Focus on social issues and global supply chain instability are acutely front and centre in defining the capital market failure in resource allocation - not able to deliver goods and services with and sustainable outcomes. Projections in a shortfall in perishable food supply chain next year are predicted and this against an uncertain geopolitical landscape could present challenging times.

The acceleration of ESG through the crisis is the impetus to stimulate the capital markets to drive back with a sustainable recovery. The challenge for investors is to understand ESG externalities and effectively factor them into share price valuation bringing fair resource allocation that serves society.

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Posted 18 September 2020 by Andreas Posavac, Executive Director, Head of Global ESG, M&A and Governance Advisory, S&P Global Market Intelligence

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.