ESG importance continues rise in investors’ weighting despite Covid-19 pandemic

By Axel  Reiserer

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  • Growing importance of sustainability and ESG reshaping markets globally
  • EBRD regions to catch up quickly with changes in investor behaviour
  • Liquidity remains concern for investors in smaller economies and companies

Despite the severe impact of the coronavirus on the global economy, the influence of environmental, social and corporate governance (ESG) issues on investor decision-making continues to grow in the economies where the European Bank for Reconstruction and Development (EBRD)is active, a new study published today finds.

The report titled The Investor Base of Securities Markets in the EBRD Regions will be presented in a panel discussion on 22 April at 14.00 BST. Panelists will include Manfred Schepers – CEO, ILX Fund, Kruno Abramovic – CEO, NLB Skladi, upravljanje premoženja, d.o.o., Christine Chow, PhD – Global Head of Strategic Governance Advisory & ESG Integration, IHS Markit, and Kaarel Ots – Chairman of the Management Board, Nasdaq Tallinn.

For more information and registration see here.

Based on proprietary and publicly available information as well as interviews with investors, the third joint report by IHS Markit, a market information provider, and the EBRD sees a “radically changed landscape” emerging “both from a regulatory and market-practice perspective”. Recent developments have “prompted capital markets to reconsider their approach to investing and risk management”, the study says.

Globally, while the Covid-19 crisis has led to unprecedented volatility, it has also “completely changed the investment and capital-market landscape, sharpening the focus on ESG and sustainability and increasing awareness of social factors”, the report says. Growing worldwide demand for sustainable products has attracted investment and hand in hand an ESG-ecosystem has evolved with access to data, intelligence, ratings and scores allowing more comparability, due diligence and modelling for investment purposes. Research points to a positive correlation between companies with good ESG profiles and their performance, valuation and risk factors, according to the report.

For the first time, IHS Markit assessed the ESG sensitivities of the main investors in the EBRD regions and their influence on capital allocation. “It is a clear finding that the more a region develops, the more ESG sensitive the institutional investor community becomes”, the study finds. The more international an institutional investor’s exposure, the more likely it is to be ESG sensitive, with greater risk management and more stringent requirements for the companies in its portfolio.

This broadly translates into ownership of larger-cap companies in the more developed regions – such as Turkey and Russia, central Europe and the Baltic states, south-eastern Europe and the southern and eastern Mediterranean region – with better ESG profiles, disclosure and ESG scores than less developed regions or smaller-cap companies. “The direction of travel is clear”, the report says. “Even in frontier and emerging markets, there will be growing pressure on companies to adjust and adhere to international best practices on ESG and sustainability. With more money flowing into these strategies and asset owners making ESG integration a prerequisite, there will be key benefits to tackling ESG issues.”

While the report sees ESG continuing to grow in importance, it also discusses other factors affecting investors’ view on the attractiveness or risk of a specific market. Liquidity remains a key challenge for many EBRD countries, especially those with small domestic markets. “In a global downturn, emerging and frontier investment destinations are some of the first to see outflows and suffer disproportionately,” the report cites one investor as saying.

Pierre Heilbronn, EBRD Vice President, Policy and Partnerships, says: “For the markets in the EBRD regions to succeed, they need to offer easy access to and liquidity for global investors. This, in turn, will depend on the depth and breadth of the combined local and foreign investor base. Few markets are viewed as attractive in the longer run if they do not have strong local investor support.”

The unprecedented fall in global economic output caused by the pandemic also had a severe impact on the EBRD regions in the year to Q2 2020. According to the report, the EBRD regions saw net outflows of US$ 4.7 billion from Q2 2019 to Q2 2020. Net investment took a hit as well, in part due to outflows, but primarily due to underperformance resulting from market volatility. As of Q2 2020, 2,046 unique firms had invested US$ 202.2 billion across the EBRD regions, down from 2,208 institutions with investments worth US$ 249.5 billion in Q2 2019 ‒ equivalent to a 19.0 per cent drop in net investment.

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