Resilience, Sustainability And ESG: IFCs Need To Embrace The Post-COVID Opportunity

As economies and communities look for ways to pick up the pieces of the pandemic and ‘build back better’, there is now a significant opportunity for high quality, resilient IFCs to respond to the challenges it has presented, take a proactive approach to economic recovery and renewal, and demonstrate their positive value.

Demonstrating an understanding of the human impact of what they do, embracing sustainability and flexing their muscle in supporting environmental, societal and governance investment will be pivotal in achieving that. By doing so, not only can they impact the global economy and communities in very tangible ways, but they can realise a double reputational dividend too.

Evolution

Of course, the concept of Environmental, Social and Corporate Governance (ESG) investing is nothing new in itself. First coined some 15 years ago in a study looking at the integration of environmental, social and governance strategies in asset management, ESG has seen something of a rapid evolution in particular over the past decade.

Whilst institutional investors were at first cautious about the impact on returns of ESG strategies and potential conflicts between their duties to shareholders and communities, more recent studies have shown that embedding ESG into investment strategies can actually help drive financial performance too. ESG investment is worth around US$30 trillion and accounts for around a quarter of all professionally managed assets around the world.

The evolution of ESG continues today, as benchmarks and reporting protocols become more sophisticated, structures and regulatory frameworks become more formalised, and specific expertise becomes more mainstream.

IFCs have had to be at the forefront of this evolution as their core clientele – institutional investors, private clients and family offices – have all sought to explore the ESG proposition. The most recent Global Family Office Report, for example, suggests that 39 per cent of family offices are projecting that when the next generation takes control of their families’ wealth, they will increase their allocation to sustainable investing.

It is not surprising that, as a consequence, a number of IFCs have, in recent years, sought to respond to this by developing ESG investment vehicles and regulatory frameworks and deepening their ESG expertise.

This ESG movement is not a short-term trend – it is a long-term evolutionary response to an environment and a population that seeks out greater transparency, that acknowledges shared cultural, social, economic and environmental challenges, and that looks for solutions to those challenges.

In our lifetime we have not seen a more shared, global event that has the potential to accelerate progress in the ESG space than the 2020 pandemic, and for those IFCs that have placed strategic importance on supporting ESG investment, now is a critical time to show leadership on the issue.

Resilience Is Key

The macro picture of the fallout of the pandemic has been widely reported – it has caused widespread market and economic disruption, with, until recently, around 30 per cent of the global population in a state of ‘lockdown’; the US and Chinese economies both contracting sharply in Q1; around $100bn being pulled out of emerging economies and developing countries, and the IMF predicting future global growth of -3 per cent.

Behind those big headline figures, though, are much more subtle, intertwined, and complex stories of social division, wealth politics, ethical behaviours and environmental impact.

IFCs will need to make a professional and astute assessment of the bigger longer-term picture and the key driving forces in this new landscape – and perhaps the most important concepts to emerge from recovery-related discourse have been resilience and sustainability.

In its recently published global Navigator report, for instance, HSBC highlighted that resilience and sustainability go hand in hand and will be amongst the most important lessons for companies and investors as they reassess their future plans.

According to that report, businesses see now as the perfect opportunity to rebuild in a way that embeds resilience into their fabric, with 85 per cent seeing environmental sustainability as a priority and 26 per cent of businesses being motivated to become sustainable to improve operational efficiency.

As neutral, expert hubs that specialise in connecting businesses and investors around the world by providing secure, safe and efficient environments, the importance of resilience and sustainability in supply chains should be something that really resonates with IFCs and provides good opportunities for ESG investment crossover.

In a new era where questions are being asked about what contribution different stakeholders make to society, IFCs will need to work harder than ever to evidence how they are working to create positive outcomes for society, and being able to demonstrate ESG excellence will be a powerful narrative.

The good news is that they are starting from a strong point. For years, IFCs have been at the forefront of providing high quality vehicles for enabling capital to be put to work quickly and efficiently where it is needed most; they have moved fast to put in place specific frameworks to support philanthropic, impact, socially responsible and sustainable investment; and they have been leaders in developing and adhering to the highest standards of good governance by complying often more quickly and more readily to international regulatory initiatives than many larger countries.

Strategic Priority

There is, though, more that needs to be done. The pandemic will accelerate ESG discourse rapidly, with commentators suggesting that Covid-19 will sharpen the focus on ESG criteria and practice in the months to come, embedding sustainable finance as a strategic priority, and adding greater sophistication in an area where there is still plenty of scope for progress in terms of weighting across the E, S and G strands and better measurement and evaluation.

It’s telling, for instance, that the UK Chancellor announced a £3 bn package of green investment as part of the UK government’s plans to decarbonise the economy and as part of its Covid-19 economic recovery strategy.

As a result of the sudden and significant emphasis being placed on ESG in the public and private sectors, IFCs will need to work harder than ever before to stay at the forefront of developments.

Engaging with key international fora will be vital, as reporting, data and benchmarking to combat greenwashing look likely to become key areas of development.

In addition, with societal, health, economic and environmental issues all emerging in developed and developing economies alike, the complexity of the fallout of the pandemic will mean that investors will need to completely revisit the rulebook they had developed pre-Covid-19 and look to reframe their vision and objectives in a completely new world.

Whilst the ‘green’ part of ESG had become the key growth area previously, for instance, the social and governance elements will become far more pronounced as economies look to rebuild.

Meanwhile, IFCs will need to find ways to communicate and illustrate the human and tangible impact of what they do in an environment that will remain highly emotive. What have communities learned from this lockdown experience, what will the tangible implications of this human experience look like over the coming years, how will it change behaviours – these are all fundamental questions that IFCs will need to consider and find ways of responding to them.

As a consequence of this far more sophisticated, multi-faceted, complex ESG landscape, IFCs will need to rapidly ensure they can provide the skillsets required to service the needs of their largely institutional-grade client base.

Collaboration and multi-disciplinary approach that can be tailored to the ESG needs of clients will be  even more important in a post-COVID-19 environment, as investors need to navigate multiple markets, sectors, structures and governance issues to achieve their aims sustainably, efficiently and successfully, built on a robust strategic platform and backed up by concrete evaluation and reporting.

It will be a new context for ESG investment, but thanks to a decade of developing a socially-conscious approach to investment behaviours and embedding professionalisation into their frameworks, the aspiration amongst IFCs to bring about change is undoubtedly there. The challenge now will be to adapt to a new mindset and transpose that aspiration into a new, highly complex and likely highly charged environment.

It is likely that in years to come, investors and stakeholders will look back on 2020 and ask questions about what organisations – and jurisdictions - did in the COVID-19 era. How did they respond? What did they do? How did they change? The answers to those questions may well influence supply chains and investor decisions in the future as resilience and sustainability become more and more embedded.

IFCs cannot afford to be left behind – but equally, those IFCs that do understand how they can play a role in addressing the societal impact of the pandemic across the ESG spectrum will be winners in the long-term and stand to make a real impact. They can provide expertise, access to capital, excellent support networks of advisers, and high-quality infrastructures and knowledge bases to help companies, families and investors make informed and directed decisions.

If IFCs can seize this window of opportunity to make sustainability and ESG not just an add-on service line but a core part of their approach, then it can underpin their long-term resilience and stand them in good stead for the future.

Geoff Cook
Geoff Cook is an experienced Chair and non-executive director. He has led significant business enterprises for more than three decades and helped major international groups to grow and prosper. As a Chartered Director, Geoff has deep knowledge of corporate governance, global regulation, and risk management. He has authored numerous articles and papers on cross border investment and the role of International Finance Centres (IFCs) in the global financial system. Geoff is an Advisor and non-executive director to a select number of Family Office, Private Capital, and Advisory boards. He was appointed Chair of Mourant Regulatory Consulting in 2021 and Chair of Quilter Cheviot International in 2019 to lead and develop the firm's international strategy. Geoff is also Chair of Apex Financial Services (Jersey) Ltd, a leading fiduciary and is presently Chair of the Society of Trustee and Estate Practitioners (STEP) Global Public Policy Committee. He was formerly the CEO of Jersey Finance and Head of Wealth Management HSBC with extensive international cross border experience across various sectors.