Proactive ESG Investing During a Global Pandemic

A Recap on ESG Investing & the United Nations’ PRI

ESG stands for Environmental, Social, and Governance. It has become an increasingly popular set of standards that socially conscious investors use to screen potential companies prior to making their investments.

In a nutshell, the environmental criteria consider how a company operates or performs as a steward of nature (reducing carbon footprint, using recycled materials, zero or low pollution, etc.). Social criteria examine how it manages relationships with people (including employees, suppliers, customers, and the communities where it operates). Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

ESG investing is sometimes referred to as sustainable investing, responsible investing, impact investing, or socially responsible investing.

The PRI (Principles of Responsible Investment) is the world’s leading proponent of responsible investment. Launched in April 2006 at the New York Stock Exchange with the support from the United Nations, it acts in the long-term interest of its signatories as well as of the financial markets and economies in which they operate. 

ESG Investing Trends

Seeing that the PRI ultimately acts in the long-term interests of the global environment and society as a whole; investors in recent years have shown an interest in putting their money where their values are. According to the most recent report from US SIF Foundation, American investors held $11.6 trillion in assets chosen according to ESG criteria at the beginning of 2018, up from $8.1 trillion just two years earlier.

The historic and ongoing transfer of wealth from baby-boomers to Gen-X and millennials has shown capital piling into ESG funds, validating sustainability goals as a means of sorting the good from the bad in society, not just on ethical and moral grounds but in terms of investor returns as well.

In fact, ESG investing is about to become mainstream investing. To put things in perspective, the PRI currently has 3,038 signatories with $103.4 trillion in assets under management (as of March 2020).

COVID-19 Made ESG Investments Go ‘Viral’

The emergence of the 2020’s global pandemic has somewhat put ESG in the spotlight.

1.    Employment – With various industries affected during the pandemic (travel, tourism, shopping malls, events, education, etc.), it comes to no surprise that the employment sector took the biggest hit. This raises the question about the wellness of the working-class people, particularly the employer-employee relationship. As a result, the duty-of-care that companies should provide for their employees—or customers, tenants, and subcontractors—is also being newly scrutinized.

2.    Sustainability – Seeing how lockdowns, movement restrictions and travel bans has benefited the environment, regulators are setting new standards of transparency when it comes to sustainability. The European Union (EU) recently announced new standards for the transparency and accuracy of ‘green’ financial vehicles (including ESG funds). In New York, building operators of anything that’s equivalent to or larger than a medium-sized apartment will be subject to emission standards and must display rating grades in their lobbies.

3.    Safety & Health – Real-estate investors would need to consider the building owners’ responsibility when it comes to the safety of tenants and customers. For instance, the spread of the coronavirus through common areas, surfaces, elevators, ventilation, etc., is a cause for concern. Factors such as routine cleaning and disinfection are now being scrutinized. Needless to say, COVID-19 has supercharged the ESG movement with regard to the social aspects of real estate.

Companies embracing ESG’s social component would come through the COVID-19 crisis stronger. According to a recent sustainability research by Morningstar, 3 out of 4 sustainable equity funds beat their Morningstar Category average in the year 2020. Furthermore, 25 of 26 ESG equity index funds outperform the most common traditional benchmarks in their categories.

Xeraya Capital & ESG Investing

Being a PRI Signatory, Xeraya Capital have pledged to put responsible investment into practice. Despite the pandemic, we’ve made 19 deals in Life Sciences in 2020, 10 of which were follow-on funding rounds. Some of our portfolio highlights include carbon capture & recycling, renewable jet fuels, scalable vaccine manufacturing as well as sustainable specialty chemicals.

LanzaTech’s LanzaJet

In summary, LanzaTech is pioneering a technology that recycles carbon from industrial off-gases; syngas generated from any biomass resource (municipal solid waste, organic industrial waste, agricultural waste) and reformed biogas. They do this by retrofitting a brewery onto an emission sources like a steel mill or a landfill site. In simple terms, pollution is converted by bacteria to fuels and chemicals.

LanzaJet is a spin-off to LanzaTech and focuses on ‘alcohol-to-jet’ technology. In short, it is converting sustainable ethanol into sustainable aviation fuel. On April 6, 2021, Shell has invested in LanzaJet as it looks to increase presence in the production of renewable fuels. Furthermore, the investment is in line with their own ESG scope which includes biofuels, carbon-capture & storage as well as climate change.

And this could not have come at a better time, as President Joe Biden recently announced plans for climate change on April 22 – which involves working with other nations and securing commitments to abide by global agreements to reduce emissions and promote clean energy.

Greenlight BioSciences

Researchers at GreenLight are developing new solutions to public health crises like the COVID-19 pandemic and sustainable food production for a growing population. They research, design and manufacture RNA-based products to naturally and safely support human, animal and plant health.

In the case of vaccinations against the coronavirus, the recent success rate of the newer generation of vaccines (like Pfizer/BioNTech’s Cominarty and Moderna’s mRNA-1273) has shown the effectiveness of using mRNA-based technology platforms. Aside from its high efficacy, mRNA vaccines are also relatively easier and much faster to produce, making them highly scalable.

Achieving herd immunity by vaccinating at least 70% of the global population is currently biggest challenge the world is facing today, especially when nations are struggling with vaccine access and logistics.

Greenlight aims to tackle the issue by providing a scalable vaccine manufacturing solutions to pharma companies worldwide. They do this by not competing with others to make their own vaccine, but instead by working together with other companies to vaccinate the world.

P2 Science

P2 Science has developed a set of unique, highly intensified, process technologies for converting renewable feedstocks into high-value, specialty chemicals. These include flavor, fragrance and cosmetics ingredients.

A key aspect of their approach is by intensifying the process chemistry, through which they are able to maximize capital efficiency, process control and cost savings. Their thin-film reactor technology allows gas-liquid reaction to be performed in seconds rather than hours.

P2’s products are made from four major market areas:

1.    Cosmetics & personal care – low molecular-weight liquid polymers made from 100% forest-derived terpenes and specialty alcohols, silicone alternatives, etc.,

2.    Flavors & fragrances – renewable carbonyls from fatty acids and terpenes,

3.    Specialty materials – diacids and esters for renewable polymers, and

4.    Bioactives – specialty acids for skin care and crop care. Terpene and fatty acid oxides for antifungals and preservatives.

Conclusion

As ESG investing accelerates in demand, several key trends are emerging – from climate change to social unrest. The coronavirus pandemic has intensified discussions about how sustainability and the financial systems are interconnected. Studies have consistently showed that investment portfolios that are heavy with firms scoring well on sustainability metrics were outperforming their more ‘traditional’ peers. 

Sources:

https://www.cfainstitute.org/en/research/esg-investing

https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp

https://foreignpolicy.com/2021/03/31/covid-19-made-sustainable-investments-go-viral/

https://www.morningstar.com/articles/1019195/a-broken-record-flows-for-us-sustainable-funds-again-reach-new-heights

https://www.lanzatech.com/

https://www.lanzajet.com/

https://xeraya.com/#!/shell-invest-lanzajet

https://joebiden.com/climate-plan/

https://www.investopedia.com/biden-s-plan-for-climate-change-5083643