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Investors see ESG-compliant projects as safe havens

As investors exercise ever-greater caution amid the Covid-19 pandemic, investments that meet ESG criteria are rising in popularity due to their less risky nature.

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With the Covid-19 pandemic testing the resilience of most companies around the world, investors are turning to environmental, social, and governance (ESG) criteria as a way to protect their businesses in this uncertain environment.

Indeed, sustainable and responsible investments are now considered ‘safe havens’ by the majority of investors, according to financial advisory and fintech organisation deVere Group. A safe-haven asset is a financial instrument that is set to retain or increase its value over a period of economic downturn.

The organisation reports that 56% of investors who are looking to include ESG-orientated investments in their portfolios do so as they think that such sustainable funds provide financial protection in times of uncertainty.

Beyond impact investing

Some investors are going one step further, by not only including ESG in their investment strategy but also moving towards impact investing. This refers to investments that will generate strong financial returns while delivering a measurable environmental or social impact.

“The best way to advocate for investments in the United Nations’ (UN’s) Sustainable Development Goals (SDGs) is to make the case for promoting impact investment,” said Jonathon Cummings, member of the steering committee for the alliance of non-governmental organisations and civil society organisations for the South-South Cooperation, at an online event focusing on trade, investment and investing in the SDGs.

Cummings explained that investors are interested in impact investing in several areas, such as agriculture and healthcare technology, which are related to the SDGs. However, he highlighted that the UN should find better ways to engage with the private sector and set up a mechanism that the organisation could use to facilitate impact investment and private sector engagement.

Sustainable setbacks

More than 25% of all investors are currently considering or are already actively engaged in responsible, impactful and sustainable investing, according to deVere Group’s CEO and founder Nigel Green.

However, despite investor interest in ESG and impact investing, the pandemic is seen as a stumbling block to achieving the SDGs by their target date of 2030, especially for developing countries. Indeed, the International Monetary Fund (IMF) announced in March that investors have removed $83bn from emerging markets since the beginning of the crisis.

The reason that developing countries are hit much more severely is because they don’t necessarily have the requisite economic support and recovery measures in place, said Isabella Bertani, founder and chief client strategist of audit, tax and advisory firm Bertani, during the online event.

However, it is not only the IMF that has reported a significant threat to investment levels. The UN Conference on Trade and Development has also announced that foreign direct investment (FDI) flows are set to drop by 30–40% in 2020 and 2021 as a result of the Covid-19 pandemic.

Bertani said that every investment includes risk and that the problem with the pandemic is that is not possible to measure the potential impact of these risks, meaning that investors are taking much more cautionary approaches.

Opting for FDI amid a pandemic is seen as too risky a choice for some investors, given that Covid-19 has created severe disruptions in supply chains, highlighting the interconnectivity of trade and services in today’s world. However, with investors re-evaluating their footprint, it is hoped that the embracement of ESG criteria into the investment strategy can help investors build more resilient businesses, which will be well prepared for future disruptive events.