The COVID-19 crisis and social unrest have given conversations surrounding environmental, social and governance a new urgency, panelists said at the recent 2020 BSR Virtual Conference.

Economic turmoil, high unemployment, the switch to remote working, and workers who may be ill themselves or need to take care of family members during the pandemic have made the corporate world attentive to employee well-being. Social unrest, fueled in part by the lockdowns and job losses, has also prompted companies to implement diversity initiatives, the panelists said.

ESG initiatives not only make a positive contribution to the environment and society but are now increasingly seen as critical for building a resilient and successful business.

COVID-19 is driving an increasing emphasis on ESG, panelists said at the recent 2020 BSR Virtual Conference. Source: Aluxum/E+ via Getty Images

Investors are interested in how companies affect the environment and society, as well as the long-term impact of ESG issues on financial performance, panelist Nathalie Wallace, global head of ESG investment strategy at State Street Global Advisors Ltd., said.

Lauren Abbott, global vice president of investor relations at Anheuser-Busch InBev SA, added that expectations from corporate ESG efforts have grown exponentially amid the pandemic. Investors are holding companies accountable for specific targets across the ESG spectrum, not just from a financial metrics standpoint, she said.

Companies are also getting ESG-type questions from investors who do not typically screen as a sustainability investor, Abbott said.

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Despite the momentum, some obstacles remain. Panelists cited reporting ESG results and impact — the data that would underscore the ESG promise — as a major concern. Abbott added that establishing an internal proprietary framework presents logistical and resource allocation challenges for companies.

Greenwashing — providing misleading or unsubstantiated claims about ESG to capitalize on the sustainability trend — also poses risks to investors, the panelists said.

PE — a work in progress

Separately, private equity has seen progress on the ESG fundraising front in recent years, but ESG-focused funds are far from becoming the dominant offering in the space.

Several private equity funds with commitments to ESG hit the fundraising market in 2020. The largest ESG-committed private equity fund in the market is EQT AB (publ)'s EQT IX fund, which is aiming to raise $16.23 billion, followed by Clayton Dubilier & Rice LLC's Clayton Dubilier & Rice Fund XI LP with a $13 billion target and KKR & Co. Inc.'s KKR Asian Fund IV with a fundraising goal of up to $12.5 billion.

The number of ESG-committed private equity funds worldwide, however, has been on a downward trend since 2017. In 2020, only 180 funds have closed year-to-date with an aggregate capital of $170 billion, mirroring the downward trajectory in overall fundraising this year amid uncertainties surrounding the pandemic, according to the latest data from Preqin.

A recent Environmental Resources Management survey of private equity investment professionals found that only 25% of respondents said their firms have a thematic ESG fund or strategy and actively look for ESG-focused investments, while 53% said they are not using any ESG framework to identify tactical opportunities.

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