We will long remember 2020 as a year of immense tragedy. In the U.S. alone, the Covid-19 pandemic has taken the lives of over 230,000 people and left millions unemployed and struggling to get by. Several months into the pandemic, the brutal killing of George Floyd spurred a massive social uprising against systemic racism. And in the last few months, climate change has fuelled record-breaking wildfires and multiple major hurricanes.
These events all reveal underlying fissures in our social and economic systems and require deep contemplation about the trajectory of society. For the nonprofit and philanthropy community, it’s an important moment to take stock of where we are and where to go from here.
The World Resources Institute (WRI) is a global nonprofit research organisation and an asset owner with a roughly $40 million endowment. As we reflect on these questions in this post, we do so in a personal capacity from where we sit in WRI’s Sustainable Investing Initiative—at the intersection of those two perspectives.
What did we know going into these crises?
To ensure a better future, we need to align investments with the Paris Agreement and Sustainable Development Goals (SDGs). We’ve known long before 2020 that securing a sustainable future requires a fundamental shift. In 2015, the Paris Agreement and the SDGs laid out a path to transform the global economy toward a more sustainable future for all. Investors, including foundation endowments, can help build this future by aligning investments with these goals. And doing so is not just a matter of mission alignment.
Investing sustainably is a safe bet. Sustainability is becoming an increasingly important driver of value creation. Investment strategies that reflect this will be better positioned for strong future performance. There is mounting evidence that integrating environmental, social, and governance (ESG) factors into an investment strategy delivers comparable returns to traditional investment practices.
What are we learning from these crises?
ESG investment products can endure market volatility. In fact, some research suggests that they do so better than their mainstream counterparts. One study, for example, found that over the first six months of 2020 – a period of extreme volatility – U.S.-based sustainable equity funds outperformed traditional funds by a median of 3.9 per cent. Another analysis revealed that nine of the 10 largest US ESG index funds outperformed the S&P 500 during the same period.
The S and G in ESG deserve greater attention. Both the public health crisis and the renewed spotlight on structural racism, have demonstrated a need for greater social protections. Investors can help drive positive impacts on this front, while managing material risks, by proactively factoring in relevant social and governance considerations. How do companies treat their employees and customers? Do they provide liveable wages and benefits? What steps are companies taking to address racial disparities in the workforce? How diverse is the company’s Board? How transparent is the company on its ESG policies and performance? Investors need to be asking these types of questions.
ESG issues shouldn’t be considered in silos. The same health and social inequities that have drawn more attention to the S and G in ESG have also underscored how interconnected E, S, and G issues are. The very factors that put racial and ethnic minority groups at increased risk of getting sick and dying from Covid-19, such as higher poverty rates and lower healthcare access, also make these groups more vulnerable to the impacts of climate change. We cannot ignore the interdependence of environmental justice and racial justice; a sustainable future depends on achieving them both.
Strong stock market performance is disconnected from the economic reality. While investment portfolios may have rebounded from March lows, the average American faces a far different reality. The continued disconnect is a sign we are experiencing a ‘k-shaped’ recovery, which will only exacerbate existing economic and racial inequities as vulnerable and marginalised groups continue to bare disproportionate burdens of the pandemic. As Paul Krugman notes, stocks are up yes, but in the face of surging ‘national misery,’ there is little reason for cheer.
Where should this lead foundations and endowments going forward?
There’s a stronger financial case than ever for accelerating the shift to sustainable investing across the investment process. From the public health crises to the wildfires, we have countless examples of the economic toll and financial materiality of sustainability and climate risks. This gives us more reason than ever to pursue sustainable investing as part of a comprehensive investment strategy. A robust sustainability lens should be integrated across the entire investment process including asset allocation, selection, and engagement.
The climate emergency is not on hold—climate action cannot wait. Reigning in the ongoing Covid-19 pandemic is a critical priority, but it cannot be an excuse for delaying climate action. Unabated, climate change will have catastrophic impacts on society, human well-being, and the global economy, with existential threats to the most vulnerable. To avoid the worst of these impacts, we need to halve global emissions by 2030 and reach net zero by 2050. 2021 will be a critical year for spurring climate action in the run-up to the next UN climate conference, COP26. While the Paris Agreement set expectations for countries to come forward with more ambitious commitments by COP26, private sector finance is also in the spotlight. The COP26 Private Finance Agenda aims to ensure that every financial decision takes climate change into account. We recently shared our strategy for doing this with WRI’s endowment. As we implement this strategy, we will draw on efforts and expertise across the Institute, for instance, the Science Based Targets Initiative, and we’re committed to sharing the details and lessons we learn along the way.
Philanthropy should seek greater impact by harnessing both their investments and grant-making. The convergence of crises this year highlights the need for bold and urgent change. As we seek to recover from the turmoil, philanthropic organisations should seize the opportunity to shape the direction of the recovery to build back better. This means directing both investment capital and grants towards projects and investments that can help address underlying inequities, create jobs, and build a low-carbon, resilient, just economy. While philanthropy is no substitute for government action, now more than ever, philanthropies should consider how their investments and grant-making can be strategically deployed to address society’s most pressing challenges.
Giulia Christianson is a Senior Associate in WRI’s Sustainable Finance Center, where she leads the Sustainable Investing Initiative. Ariel Pinchot is an Associate with the Sustainable Investing Initiative in WRI’s Sustainable Finance Center.