By Willem Keogh, Head of ESG and Thematic Solutions, Qontigo
The theme of sustainability will continue to top the global agenda as the World Economic Forum (WEF) meets in Davos, Switzerland, this week.
The 50th annual gathering of leaders in finance, industry, government and beyond will address the theme of ‘Stakeholders for a Cohesive and Sustainable World.’ Around 3,000 attendees1 are expected at the summit from today to Jan. 24, and some 500 journalists will report on the sessions’ highlights for the global community.
The choice of theme is no coincidence. In the last two years, awareness of climate, governance and societal issues has gained spectacular momentum. These concerns are by no means new, but they have now moved to the forefront after being considered a fringe ideal just a few years ago.
A yearlong study2 presented by McKinsey this month found that the human, social and economic consequences of climate change are real and dramatic. For example, the consultancy firm found that, by 2050, up to 1.2 billion people could live in regions with chances of fatal heatwaves, a consequence of temperature increases. As many highly populated areas are becoming hotter and more humid, this could lead to as much as $6 trillion globally in lost working hours in an average year, McKinsey said.
Amid such bleak expectations, we are seeing sustainable ideas shape the way corporate boards and public bodies look at their policies and operations. Executives are using sustainability criteria, which have infiltrated financial and economic models, to assess challenges and opportunities. Economists now measure the increase in carbon emissions in the same way they track GDP growth and inflation to gauge the quality of economic improvement. Environmental, social and governance (ESG) risk ratios are an increasingly common variable in portfolio analysis, akin to credit and liquidity risk.
Asset managers stepping up
BlackRock announced on Jan. 14 that sustainability will be its new standard for investing. The world’s largest asset manager listed steps it will take to make sustainability the primary guide of its offerings and of its fiduciary duties. As the industry leader makes the bold and prescient move to incorporate responsible criteria across the board, this will become a watershed moment that will pull many others with it.
In a letter to investors, BlackRock Chief Executive officer Larry Fink wrote that same day that climate change appears as a deeper and more protracted source of risk for financial markets than were the inflation spikes of the 1970s, currency devaluations of the 1990s, or the dot-com bubble and global financial crisis more recently.
BlackRock isn’t alone among asset managers. Many pioneering companies have already embedded sustainable practices into their operations for years; and they continue shaping the investment landscape.
At STOXX, we have advanced sustainable investing with products launched as early as 2001. In the past 14 months, we introduced versions of popular benchmarks that exclude controversial activities from portfolios, as well as indices that also incorporate ESG scoring into stock selection.
This is the way forward: from a niche place, ESG investing has moved to mainstream, and with time it will become the standard and benchmark for all portfolios. The last step won’t happen immediately, but the path ahead has been laid.
Shared value creation
ESG principles and impact investing are pieces of a larger puzzle in which the corporate world plays a protagonist role. More and more companies are rising up to their responsibilities as trustees and integral parts of the societies they operate in. This is the ‘stakeholder capitalism’ proposed by the WEF’s founder, Professor Klaus Schwab, in the 1970s.
To accompany the change we are seeing in corporate culture, Schwab and the WEF introduced an updated Davos Manifesto ahead of this week’s meeting. The manifesto states that companies should follow fair tax, production, labor and competition practices; and should act as stewards of the ecosystem around them.
The Davos Manifesto will no doubt serve as a guiding light for discussions during WEF week. Scheduled panels will address topics including the carbon-neutral economy, transparency in global supply chains, stakeholder capitalism and long-term investing, data reliability, green transition, the United Nations’ Sustainable Development Goals, and plenty more.
It will be a great opportunity to listen how leading asset owners and portfolio managers are adjusting their portfolios and risk parameters as the world embraces responsible action.
1 Swiss government estimates.
2 McKinsey Global Institute, ‘Climate risk and response,’ January 2020.