ESG Pioneer Georg Kell on the Power of a Crisis to Shake Up Markets

At a time of incredible economic upheaval and business and political uncertainty, the durability of sustainable investing has been one of the brighter lights on the horizon. More money than ever is pouring into sustainable or environmental, social and governance (ESG) investments. These have grown by a stunning 34 percent over the past two years to $30.7 trillion — a trend that seems pandemic-proof, as TriplePundit has reported.

While this might seem like a relatively recent development, it’s been a long time coming. Few people know that as well as Georg Kell, considered one of the fathers of ESG investing. His new book, Sustainable Investing: A Path to a New Horizon, looks at the historic convergence between corporate sustainability and sustainable investing as a major force driving systemic market changes. As founding executive director of the U.N. Global Compact, Kell led a group of CEOs from over 50 major financial institutions in a UNGC initiative to integrate ESG into capital markets. This led to the groundbreaking U.N. report, Who Cares Wins, the springboard for the U.N.-supported Principles for Responsible Investment. Today Kell is chairman of  Arabesque, an ESG Quant asset manager, which has built a tool around the core principles of the U.N. Global Compact to financially identify ESG issues using artificial intelligence.

Kell co-authored his new book with Herman Bril, director of the U.N. Joint Staff Pensions Fund, and Andreas Rasche, professor of business in society at the Copenhagen Business School's Centre for Corporate Social Responsibility. Among the heavyweight contributors are Paul Polman, former CEO of Unilever, a corporate sustainability luminary, and John Ruggie, professor of human rights and international affairs at Harvard’s Kennedy School of Government, who developed the U.N. Guiding Principles on Business and Human Rights. The foreword is by Mark Carney, former governor of The Bank of England, who famously coined the term “tragedy of the horizon” in 2015 to describe the catastrophic impact of climate change. The opportunity to avoid that tragedy inspired the book’s title.

I had a chance to speak with Kell about what he sees as the remarkable trajectory of ESG, both as a compelling business case and as one of the most significant trends in investing over the past decade. In these extraordinary time for companies, investors and markets alike, we discussed why this is an ideal moment to accelerate those market forces, kick the status quo to the curb, and define a new way forward.

TriplePundit: Why did you want to write this book, and how is it timely for the moment we are living in now?

Georg Kell: Finance has been lagging behind the real economy on the sustainability evolution by at least 10 years. That began to change with the first meta-studies that came out in 2014, including the work that Arabesque did with Oxford University, demonstrating that sustainability practices have an overwhelmingly positive influence on investment performance. The correlation between corporate performance and sustainability was very strong and powerful. Since then, we have seen the remarkable rise in ESG because the materiality notion was understood — that we're not only talking about doing the right thing and morally making the right choices, but it also has real financial implications.

All of a sudden, finance has started to catch up rapidly. Now some investors are out there pushing for change much faster than some corporations are capable of delivering it.  A historic new convergence between corporate sustainability and sustainable investing is becoming a major force driving systemic market changes.

And now COVID-19 has shaken up established thinking and made us aware of vulnerabilities. At the same time, it is made it easier for executives to push for change that they wanted to do anyway. On the investor side, COVID-19 has put the spotlight on risks that are not yet part of the price signals that we know are out there and will hit us.

3p: Is the growing climate crisis a big reason for the surge in sustainable and ESG investing, and do you see this movement as mainstream?

GK: The climate crisis has been in the making for years, and we know that with scientific certainty. Yet many investors love to ignore it because it's long-term and slow moving. COVID-19 is almost like a wake-up call: This is for real, we had better prepare. Now we had better do something; otherwise it could threaten our very existence. Some are hearing this wake-up call. The evidence is there. For example, the Science Based Targets Initiative (SBTi) has seen a record flow in new participants since COVID-19 hit. Many more companies are now aligning their decarbonization goals with science-based targets.

The pandemic is changing risk perceptions in a fundamental way, enabling executives to drive change faster. There is no doubt that COVID-19 is acting as an accelerator for sustainability issues and in particular decarbonization. It has sharpened the awareness that the next big breakthrough in the corporate sphere is to establish firmly the business case for decarbonization. We’re on the cusp of a transition to a net-zero economy that could lead to a more sustainable financial system. For that to happen, sustainable investing must go mainstream. Some people think it’s already there, but of course it needs to be accelerated even faster.

Tomorrow, we’ll continue this conversation on ESG investing as we’ll discuss the challenges of building a more sustainable financial system worldwide.

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Image credit: PXHere