Neha Coulon on the Growth of ESG Investing

When the COVID-19 pandemic hit in early 2020, many thought the focus on environmental, social, and governance (ESG) criteria would wane as businesses struggled to survive. Instead, by the end of the year, global assets under management in ESG-focused funds skyrocketed, increasing by an astounding 96%.

At a spring Gabelli School Virtual Centennial Speaker Series webinar sponsored by the Gabelli Center for Global Security Analysis, Neha Coulon, partner and global head of ESG at Kirkoswald Capital Partners LLP in London, and former global head of ESG solutions at JPMorgan Chase & Co., said that ESG investing hasn’t seen a shift of that scale since the Paris Agreement in 2015. Only five years later and during a global pandemic, ESG soared, proving that it is a top priority for today’s investors.

Coulon shared her thoughts about the impact of ESG on business and investing with Fordham Business.

Q: What explains the explosive growth of ESG assets since 2020?
A: The gradually increasing levels of ESG awareness among consumers, investors, and policymakers laid the foundation before COVID-19 hit and laid bare the reality of non-linear risks associated with pandemics that markets seldom price into asset valuations. For many managers, ESG became a way to differentiate themselves and raise assets as retail and institutional investors piled money into ESG funds. This momentum sent valuations soaring for ESG “winners,” perpetuating the rise in assets that we saw from flows alone.

Q: How can ESG data reveal if a company is a sound investment?
A: I don’t think we should think of ESG data as a magic bullet. Like with any other data, ESG data needs understanding, interrogation, and checks for accuracy and robustness. If used thoughtfully, ESG data can reveal elements of medium-to long-term risk that a company may be facing and allow investors to interrogate the long-term sustainability of the earnings of a company.

Q: How are companies reducing their carbon footprints?
A: It varies by industry. The leading sustainability-focused companies use a combination of approaches: reducing the carbon intensity of their operations by reducing energy usage, fugitive emissions, or waste where possible; procuring renewable power where available; signing long-term corporate power purchase agreements with renewable energy developers; and offsetting their residual footprints through high-quality carbon offsets. Investing in low-carbon technologies is another key effort that many carbon-intensive companies are embarking on to meet their long-term, net-zero commitments.

Q: What new regulations are controlling the ESG space?
A: There are too many to name. The EU was a pioneer with a raft of disclosure, taxonomy, benchmark, and other regulations. Understanding climate risk is a big focus now.

In the U.K., mandatory climate reporting will come into effect in Jauary 2022 for all premium-listed firms, and is expected to apply to all companies by 2025. In the U.S., the SEC is contemplating making climate disclosures mandatory for corporates as well.

Central banks, including the Fed, the Bank of England, and the European Central Bank, have created climate stress-test models and are expected to roll them out in the near future. Many countries, including China, the United Kingdom, and France, have committed to climateneutrality, and are taking steps to decrease their overall carbon emissions, with China launching its own emissions trading scheme recently.

France and Germany have passed human-rights diligence laws requiring companies to ensure human-rights are observed in their supply chains. The European Council also recently adopted a global human-rights sanction regime to impose travel bans and financial sanctions on individuals and entities involved in human-rights abuses.

Q: How is ESG affecting the consumer goods market?
A: Consumers today are certainly ESG-aware! There is increased focus on human- rights violations in the supply chains, sustainable agriculture, decreasing waste, circular economy, reduction of toxic chemicals, and reducing the total lifecycle carbon emissions from manufacturing a product. A recent study found that sustainability-focused brands are priced at a premium of nearly 40% over conventionally marketed products, and yet, sustainability-marketed products grew over seven times faster than conventional products between 2015 and 2019.

Q: What are the fastest-growing ESG-related careers?
A: Based on my experience, there is a lot of hiring happening for ESG analysts among asset managers, climate risk managers at banks (to help them respond to climate stress tests from central banks), and corporate sustainability roles to help companies improve their sustainability reporting (ESG reports, climate reports) and meet their sustainability commitments. There is also an explosion in data startups capturing a variety of geospatial, high-frequency, or other types of climate/ESG data and others who provide scenario analysis and insights into the impact of climate change on asset prices. Many of the ESG data providers are investing heavily in climate data and analysis. Finally, increasing regulation will certainly need lots of policy advocacy and legal expertise focused on ESG.