ESG and Renewables post-Covid

July 2020

The first real stress test of ESG funds came with the emergence of coronavirus. Going into the crisis many described ESG being at the top of a hype cycle and questioned whether it was a bull market phenomenon that would wilt in a downturn; these people have been proved wrong.  The argument has been made that aligning corporate, and investment goals to the Paris Agreement is easier in a growth market than during a downturn. If so what does this current situation mean in practice for investors and corporates alike?  We decided at the Energy Council to have a take snapshot of the market and see what the numbers tell us.   

Any fund can be analysed in three broad ways: performance, capital flows and client focus.  In terms of performance, Blackrock recently proclaimed that 94% of sustainable strategies in 2020 had outperformed their conventional counterparts and Morning Star identified 44% of ESG funds in the top performing quartile of funds over the start of 2020.  If you adjust those ESG numbers for being underweight in oil stock, the securities selection within the renewable energy sector contributed to that financial performance.  Capital inflows into ESG witnessed record numbers in Q1 and have continued to be resilient with the ETF sector in remaining buoyant beyond April.  Across the spectrum of corporates, asset owners and asset managers, we are now in fact back to the volume of allocation activity witnessed pre-COVID.  On the face of it, it seems that ESG has passed its first major market test, showing resilience and securing/providing returns in unprecedented times. 

Measuring the impact – the threat posed by the S in ESG

Moving forwards, all energy companies need to earn their ESG credentials, and renewables are no exception.  Recent events in the U.S have sparked protests around the globe and played a role in heightening awareness around social governance.  There is a genuine concern that funds will therefore allocate with more rigour capital allocations to the S in ESG.  One practical way the renewable industry can unlock enhanced focus of fund managers and allocators, is by establishing a clear disclosure regime.  An industry benchmark can lead to greater trust in projects being taken to market, and hydrocarbon displacement is highly measurable unlike some aspects of social governance.  Executives can act now to establish clear, transparent policy mechanism that allow investors to measure the impact of their investment decisions.  Energy Council members believe there is still a lot of work to be done around disclosure and that the support of banks and public institutions is crucial   

One such regime that many banks are now looking at is through TCFD disclosures, and investors can use those directly to better inform capital allocations choices.  Further afield much has been done by central banks around the NGFS framework, which looks to enhance predications of how climate change can impact monetary policy deliberations.  Blending a common policy, investment and technology within a single recognisable dataset, we believe should become number one response of industry addresses in order to maintain primacy of access to ESG capital inflows.   

Conclusions

All market participants agreed that we would be better off and in a stronger position with access to better data, on fewer things that matter more.  Getting ESG data out of the adolescence phase is important cog to keep renewable investment moving forward.  This doesn’t always have to be at a broad pan-regional level, but pragmatically it can be between the promoter, developer, sponsor and the investor who can all agree to achieve a certain impact on a project basis.