The pandemic has accelerated the pace at which money is flowing towards sustainable investments and created a clamour for talent and experience unlike anything we’ve seen since the early 2000s.
What was once a matter for debate is now settled: the pandemic has accelerated rather than dampened the pace at which money has flowed towards sustainable investing.
Some €52 billion flooded into European sustainable funds during Q3, up more than two fifths on the same period a year earlier, according to Morningstar. Meanwhile money managers launched 105 new European sustainable funds during the quarter, attracted €3.6 billion of new capital.
It’s clear we are at a watershed moment for ESG investing. Europe has been the regulatory pace setter, leaving the US trailing. However, the election of Joe Biden as US president – with his ambitious pledges to tackle climate change, environmental and social inequalities – crystalises the global direction of travel and increases pressure on industry laggards.
Perhaps most importantly, however, is the growing body of evidence that supports the hypothesis that sustainable funds outperform their broader market counterparts. European sustainable funds held up better than competitors during the Covid-19 sell off during the first quarter, achieving excess returns of between 0.09% and 1.83%, according to Morningstar.
Expectations are now running high. A survey conducted by HSBC found 86% of its clients expect sustainability to boost their profits this year.
These themes extend beyond the listed financial sector, which I use here as an example due to the granularity of the data available. Indeed, the realisation that ESG requires more than just lip service and will in fact directly fuel revenue growth both this year and beyond is being played out across businesses large and small, public and private.
That is what lies behind a corporate repositioning unlike anything we’ve seen since the clamour for skills in the run up to the tech crash of the early noughties. Unlike the former, which was driven by speculation, this is a battle against obsolescence and a drive to make a success of the coming economic cycle – a cycle that will be defined by capitalism’s relationship with the environmental and social good.
At McLean Partnership we have a unique perspective into these shifts. We recruit for institutional investors, private equity and businesses both public and private, so we witness first hand the manner in which sustainable initiatives change behaviour.
The demand for talented people to drive change and execute sustainable initiatives is immense. Within our fund management practice, for example, approximately 80% of projects we’ve worked on during 2020 have been ESG-linked in some way and our business pipeline suggests this is no temporary surge.
Race for talent
How this race for talent and experience manifests itself depends on where you sit in the business and investment community, and can be distilled into a handful of broad trends.
Firstly, financial institutions are now under acute pressure to find senior managers able to read the ESG tea leaves, whether that is finding individuals in investment management that are able to innovate with new products, or those able to provide the right advice to investment banking clients.
These skills are still relatively nascent and demand is so strong that we are seeing the price of candidates’ services moving upwards.
Secondly, at a more junior level, where the search for talented analysts is no less competitive, prices are coming down. This might seem counterintuitive, but we are now fishing in a much larger pool for those with the right skills. Our shortlists for analysts with ESG-linked skills now include candidates from institutions including the UN and the World Bank, or think tanks, universities and not-for-profit organisations.
Meanwhile, the cost of natural resources analysts has fallen by as much as 50% in a decade. A director in metals and mining that would have set firms back about £500,000 each year now attracts about £250,000. Sustainable roles offer a move away from sectors in structural decline and an elongated career, putting candidates from both worlds in direct competition which weighs on compensation.
The third trend relates to the decisions these investors are taking to funnel capital out of public markets and into private ventures, where it’s easier to have an impact if you know where to look. That’s growing and reshaping both the firms disrupting existing industries and the established players.
Through our relationships with clients we have witnessed first hand the growth of modular housebuilding, for example, which holds a number of environmental and societal benefits, not least the possibility of making a meaningful dent in the nation’s housing shortage.
Some of the UK’s largest housebuilders are working to establish their own in-house capabilities and a handful of pure modular developers and contractors are now flourishing.
These modular developers, from a people perspective, have little in common with a traditional housebuilder. Boards and management teams are staffed by executives from industries including automotive and retail – those with first-hand experience of disruption on a significant scale and an understanding of how an industry can pivot in a matter on months.
The wider company is just as likely to be staffed by industrial designers, individuals with backgrounds in manufacturing, technology entrepreneurs and scientists as they are construction managers with decades of site experience. This is a narrow example, but it is being replicated at scale across scores of industries.
I’ve picked out areas in which the clamour for ESG skills is well established in this piece, however we continue to interact with many firms for which the realisation that sustainable initiatives can drive profits is only just starting to sink in.
Implementing these initiatives is particularly embryonic among small and mid cap public companies, who are now beginning to appoint executives and non-executive directors to oversee them. At this stage it is only a small but growing minority, and here lies both the threat and the opportunity.
We can all think of retailers that missed the e-commerce moment because their boards were packed with a demographic that didn’t engage with internet shopping in their everyday lives. A lack of board-level understanding of ESG issues could have similar results during this economic cycle.
Companies must adjust to reflect the world as it changes around them, starting with the board. Decision-makers unable to see this truth risk being the ones left behind in a recovery that is forecast to gain momentum through spring and beyond.