Journal № 1 (15) 2022
The definition of a ‘paradigm shift’ usually describe it as a fundamental change in the basic concepts, approach or underlying assumptions of a discipline, and this seems a fair definition of the major structural transformation currently reshaping the global investment landscape. Investors, particularly those of scale, have in recent years undergone a paradigm shift, transformed by a major realignment of priorities and expectations around environmental, social and governance (ESG) issues. Institutional investors are increasingly concerned about how their choices and strategies are impacting the environment and wider socio-economic development.

Some in the investment community perceive this as a natural progression - that is, an evolution of the motivations and goals previously articulated and expressed via a focus on the CSR (Corporate Social Responsibility) outputs and altruistic or philanthropic activities of companies. But the sheer scale and speed of the recent change, also reflected in the concerted redirection of the attention and interventions from policy makers and regulators, suggests something more radical, more akin to a revolution – a structural realignment of priorities and purpose.

There are now many indicators and proof points to support this view.

The United Nations-supported Principles of Responsible Investment (UN PRI), an international organization that seeks to integrate ESG considerations into mainstream investment decision-making, reports that the number of major financial institutions committing to its principles has risen by over 420% since 2010. It now comprises nearly 4000 organizations with a total AUM of more than US $120 trillion.

Source: UN PRI

The UN PRI also maintains a database, covering 85 countries, of policy instruments and regulatory changes focused on driving responsible and sustainable investment practices, and it reports a surge in such policies in recent times. The first half of 2021 saw the introduction of 159 new or revised responsible investment policy instruments (more than the total for the previous year). The PRI policy team state the recent trend ‘reinforces the strong signal that responsible investment is now mainstream and a must’, also commenting on the momentum behind these interventions; ‘…let’s just say ‘unstoppable’ feels like an understatement’. (*1)

Many of these policy initiatives are rapidly moving from industry-specific ‘good practice’ guidelines towards being mandatory obligations. As institutional investors seek to reweight their asset allocations and redirect capital to support their ESG objectives, they have also been making louder calls for better data from companies and more consistent reporting mechanisms to allow them to make more informed decisions.

The demands for greater clarity and evidence of demonstrable corporate action on sustainability factors have coalesced around the challenge of climate change and, specifically, the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). This is, in part, because climate change is now recognized as the most significant challenge to global stability and prosperity and is already having very severe destructive impacts on the earth’s eco-systems. This recognition is, unfortunately, long overdue. The climate science has been frighteningly clear for many years but is now simply incontrovertible and relentlessly alarming. Institutional investors have, in response, been amplifying their demands for clarity and coordinated responses to climate-related risks, while reconsidering their investment strategies and asset selection criteria.

The global economy will have to adapt to both build resilience against climate impacts and to rapidly reduce its greenhouse gas (GHG) emissions to avoid the most catastrophic impacts. And private finance will play a key role in funding this transition to a more robust low-carbon future. While some commentators still view the management of these issues as primarily the responsibility of governments, the institutional investment community, in embracing the ESG agenda - both as an opportunity and as part of a wider acknowledgement of social and environmental factors as potential systemic risks - has often shown leadership and taken the initiative in driving change.

This was again witnessed late last year in Glasgow, Scotland, at the United Nations’ global climate conference - that is, COP26 (*2). Perhaps the clearest statements of intent emerging from the event came from the investment and finance community, with former Bank of England governor Mark Carney highlighting the rapid growth in institutional investor support for climate action via the Glasgow Financial Alliance for Net Zero (GFANZ). The AUM of GFANZ’s membership recently reached over US $130 trillion.

A few days before the COP26 event, Mark Carney had written in the Financial Times: “We must build a financial system entirely focused on net zero… Your money matters. In the months and years ahead, judge all financial institutions not by what they say but by their numbers.” These comments also reflect another common theme emerging from investors’ consideration of ESG and climate objectives; the need for clear measures of progress, and the demonstrable integrity and accountability of those reporting on their progress.

And, while climate-related risks may have galvanized the investment community in seeking to define a coherent and coordinated response, particularly in support of decarbonization targets, there is already a broad acknowledgement of the need for progress on the wider ESG agenda.

The need for greater market recognition of the value of the natural environment and biodiversity (*3), coupled with strategies to prevent further nature loss, has led to the launch of the Taskforce on Nature-related Financial Disclosures (TNFD), already endorsed by G7 Finance Ministers and the G20 Sustainable Finance Roadmap.

The use of the UN Sustainable Development Goals (SDGs) as a valuable reference framework by which investors may judge corporate and sectoral performance on a wide range of ESG objectives has also gained considerable traction recently. Investors are currently exploring methods of formalizing and quantifying company and sectoral performance and impacts on a wide range of development indicators. Some commentators perceive this as a further extension of the global sustainability agenda as it relates to investment decisions.

We at the World Gold Council (WGC) are very mindful of the role of responsible business in responding to the urgent needs for awareness, transparency, and action on a wide of range of ESG-related factors. We also believe a responsible gold industry can play a significant role in catalysing wider development, with a range of positive social and economic outcomes.

While institutional investors in gold have, until recently, primarily been focused on the risk hedge and diversification qualities of bullion and bullion-backed exchange traded products, they are also increasingly interested in the provenance and sourcing issues associated with physical gold as a mined product. It was the need to ensure that gold mining can demonstrate to all its stakeholders that it operates to very high standards of performance across a wide range of ESG factors that the WGC formulated the Responsible Gold Mining Principles (*4), after years of extensive consultation with a wide range of interested parties, including government, civil society and community leaders. These principles are now mandatory for our Member companies – most of the world’s major, forward-thinking gold mining companies (although we are still waiting for a Russian company to join the WGC) and, importantly, they are independently assured. They are also being used by companies beyond our membership and increasingly recognized across the whole industry as a comprehensive and credible framework that offers all gold mining companies the means to be able to demonstrate with confidence that their gold has been produced responsibly.

Similarly, our Member companies have recognized the significance of investor calls for clearer and more consistent reporting on climate-related issues. They have, therefore, recently agreed to report their climate-related positions and plans in alignment with TCFD guidance. It is worth noting here that this journey for companies - towards a more comprehensive understanding of how climate will impact a business and vice versa, leading to full disclosure of an organization's position, plans and progress – will rarely be simple. But all corporate entities, and all sectors of the economy, now need to recognize that this is rapidly becoming a core part of doing business.

I mention the WGC’s initiatives not simply to describe our own progress on reshaping our business and strategic activities in the context of the developing ESG landscape, but because I think it is also reflective of the global trend and fairly typical of how many sectors are seeking to adapt and re-orientate themselves to an expanding set of risks and opportunities.

While some business leaders may feel uncomfortable with mandatory disclosure rules being imposed upon them, there is growing evidence that these regulations may have significant benefits. For example, research last year (from the European Corporate Governance Institute and the Swiss Finance Institute) found that, “Mandatory ESG reporting helps to improve a firm’s financial information environment: analysts’ earnings forecasts become more accurate and less dispersed after ESG disclosure becomes mandatory. On the real side, negative ESG incidents become less likely, and stock price crash risk declines, after mandatory ESG disclosure is enacted.” (*5)
I should acknowledge that there is still considerable debate on the merits and credentials of ESG-focused investing. The Wall Street Journal, for example, has published a series of columns challenging the prioritization of ESG investing (*6). These articles make several good points regarding the risks and flaws of the rapidly emerging field of ESG investing, not least the dangers of problematic, polluting assets being transferred into opaque private hands, and the possible threat of sustainability-driven investment bubbles. But this commentary, and others like it, also suggest a rather narrow and polarized view of the overall objectives of ESG-focused investing and therefore may be blinkered to the tremendous opportunities for positive change it represents. In other words, they seek to resist or deny the idea of a paradigm shift and often, somewhat selectively, focus on specific failings while neglecting the ‘big picture’ transformation and the solutions it promises.

The assumption behind many market participants and commentators resistant to integrating ESG objectives into mainstream investing is that it will require a sacrifice of returns. But there is an abundance of evidence to suggest they may be misinformed.

A substantial body of analytical and academic work now points to the positive correlations between ESG performance and company resilience and value. Recently, for example, financial analytics provider MSCI Inc. concluded a four-year study on this issue and found that companies with high ESG scores experienced lower costs of capital, lower equity costs, and lower debt costs compared to companies with poor ESG scores (*7). And experts at McKinsey, citing more than 2,000 academic studies, concluded that better ESG scores translate to around a 10% lower cost of capital, while reflecting lower regulatory, environmental, and litigation risks (*8).

There is also a very simple point that is often neglected when estimating the costs associated with funding the transition to a net zero carbon and nature-positive economy; that is, the costs of inaction which are still not adequately captured but may come to weigh far more heavily on global prosperity and our collective socio-economic health. But even those economists that suggest an extremely high cumulative level of investment needed to deliver a decarbonized economy are clear that the alternative cost – of business-as-usual – is far higher and more worrying. In a Reuters’ survey last year of over 40 leading economists on their estimates of the cost of climate change, James Nixon, head of climate change macroeconomics at Oxford Economics, offered the highest estimated cost but then stated, “"While mitigation may be expensive and potentially politically painful, I think it's incumbent on economists to show that not doing anything is even more expensive." (*9)

Skepticism on ESG as a driver of change may also result in an under-estimation or neglect of the scale of opportunities embedded in the transitional economy. The International Energy Agency (IEA), in mapping out a credible, albeit challenging, pathway to a net zero carbon economy, suggest it will bring ‘a historic surge in clean energy investment that creates millions of new jobs and lifts global economic growth’. (*10) Similarly, The New Climate Economy suggest that bold climate action could potentially deliver $26 trillion in economic benefits through 2030 (compared with business-as-usual), while generating more than 65 million jobs. (*11)

One of the pre-requisites for investors seeking to address climate and sustainability challenges - intrinsic to the ESG paradigm shift – is the need for longer-term perspectives and commitments. Climate change in particular requires risk scenarios and plans that stretch across decades. There is now a growing wealth of evidence to support the thesis that this short-termism is a problematic feature of market behavior that demands our attention, and data from both individual firms and the wider economy suggest that such behavior is value-destructive. (*12) The growing focus on ESG-conscious investment may, however, help counter the market’s more myopic tendencies.

Looking forward, it is almost certain that the trends I’ve discussed will continue to accelerate. Pressure will grow for corporate boards, and asset owners and managers, to all be able to demonstrate they understand and are adequately prepared to address ESG issues. Global ESG-related standards will continue to evolve and converge in 2022, and further efforts will be directed towards the removal of obstacles to greater accountability, integrity, and consistency on corporate and sectoral performance.

All of which means we are already well beyond the point at which ‘wait-and-see’ is a valid strategy for most businesses and investors. When considering climate and ESG factors, the time for change is now; the paradigm has shifted. As a Boston Consulting Group report, analyzing the potential value created by decarbonizing the economy, recently stated: “Exactly how the world will reach net zero is unknown, but at a macro level the science and economics define a pretty clear path. Given the magnitude of value at stake during the transition, many leaders are concluding that inaction may be the riskiest strategy of all.” (*13)


  3. “More than half of the world’s economic output – US$44tn of economic value generation – is moderately or highly dependent on nature.”
  9. James Marshall, of Oxford Economics, suggested the cumulative amount of investments needed to fund climate change mitigation might total around US$140 trillion by 2050, compared to the median estimate of $44 trillion;
  12. See, for example: Finally, proof that managing for the long term pays off (Harvard Business Review, 2017); and The macro impact of short termism (Stephen Terry, 2017);