In a piece entitled “Better to leave the free market alone” Robert Shillman, chairman of the NASDAQ listed Cognex Corporation, bemoaned a “trend of bashing both our free enterprise system and our businesses which have thrived under that system for the past 200 years.” In particular he took aim at fund managers, whom he accused of pressurising companies “to include ESG factors when making business decisions”, questioning whether fund beneficiaries would approve of such an approach.
Shillman posed the question – “do [fund investors] want the board of directors and the managers of your companies to spend time and energy on environmental, social and governance issues or do [they] want them to spend all of their time and energy on increasing the value of [their] shares?” His response: “I’m rather sure that an overwhelming number of them would choose the latter.” Many would argue the data shows unless you do a good amount of the former, you can’t deliver on the latter.
That said, it would be wrong to describe Shillman as an ESG sceptic – it is rather more complex than that. He believes the integration of ESG factors in corporate decision making is important and he takes pride in Cognex’s impressive track record in this regard. But he believes it should be left to companies to determine whether and how they integrate ESG concerns, not institutional investors.
Shillman wrote the above in his company’s 2018 Annual Report. There has obviously been a lot of water under the bridge since then. A new consensus has emerged that the ultimate beneficiaries of funds – citizens – expect large, institutional fund managers to do precisely what Shillman argued against, when it comes to investing their life savings, looking after their pension pots, and so on. It is clear – the aftermath of Covid-19, and the reaction to the tragic murder of George Floyd in the US, have turbo charged the focus around ESG, and lifted the prominence of the “S” and the “G” in ESG. There is no doubt the #MeToo campaign and backlash against fiscal austerity before 2020 had an impact before this too.
Over summer, we carried out a survey of over 22,000 respondents in 11 markets as part of our ongoing Trust Barometer. This underlined the importance attached by the public to the ESG profile of businesses today. It revealed that in the face of the Covid-19 pandemic, people want brands to protect the well-being and safety of their employees and suppliers even if it means suffering big financial losses until the pandemic ends (90%). After the death of George Floyd shone a light on racial injustice and precipitated statements of solidarity with the black community from business leaders, respondents said brands in the U.S. must first get their own house in order by setting an example within their organization (64%), by reflecting the full diversity of the country in their communications (63%) and by making products accessible and suitable to all communities (61%). The consequences of businesses not meeting expectations now are stark – for example, 60% of all respondents said they will buy or boycott a brand based on its stand on racial injustice.
Furthermore, investors increasingly do not see ESG integration and financial returns as an either/or choice but two sides of the same coin. Our latest Investor Trust survey of 607 institutional investors, representing investment firms that collectively manage over $9 trillion in assets, had 54% of respondents stating that ESG initiatives led to a favourable impact on growth and 47% saying it boosts the return on investment. A good example where a poor ESG profile damages the financial standing of a business is the UK fast fashion chain, Boohoo, which lost a third of its market value in July after controversies relating to its supply chain were exposed.
This is all corroborated by data on ESG funds flows this year. Refinitiv’s Sustainable Finance Review shows that in the first half of 2020 nearly $200bn in sustainable bonds was issued globally – an increase of almost half, year-on-year, and double the amount raised in H1 2018. Remarkably much of this growth took place in Q2, when the pandemic was at its worst, with $130bn raised, the highest quarterly amount ever. Likewise social bond issuance has rocketed with already more than double the total amount raised in 2020 than for the whole of 2019, driven by capital raising for COVID-19 related recovery efforts.
This trend is only likely to continue. Millennials – those born between 1981 and 1996 – were significant drivers of the growth in demand for ESG products, long before the Covid era started and their influence is set to escalate. According to a 2018 U.S. Trust Insights on Wealth and Worth® survey, 87% of millennial high net investors say a company’s ESG record is an important consideration in their decision about whether to invest or not. And there is a huge, inter-generational transfer of wealth currently ongoing with around US$24 trillion expected to come under the control of millennials from this year.
So the truth is that in this post-pandemic world, it is actually the free market which is demanding ESG factors are integrated into corporate business decisions – fund managers are simply following the orders of investors.