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Sustainable finance during and post the COVID-19 era

The International Monetary Fund (IMF) updated the World Economic Outlook in June and announced that in an unprecedented forecast, global growth is projected at - 4.9% in 2020 due to COVID-19 pandemic. What is the impact of this crisis on sustainable finance(i)?

Various research results have been published on sustainable finance during COVID-19. Research commonly indicates the fact that sustainable companies perform better than average during COVID-19, which also confirms the effectiveness of ESG investments.

For example, according to a research by Schroders, the top 20 percent of ESG-ranked stocks in the U.S. stock market outperformed the average significantly between January and March 2020(ⅱ) . In addition, MSCI reported that both of the four indexes disclosing ESG components, including SRI and the two indexes disclosing climate-related targets were well above market averages between January and April 2020 (MSCI World Indexes) (ⅲ).

World Business Council for Sustainable Development (WBCSD) reports that the stock prices of WBCSD member companies have largely exceeded the benchmarks of major stock exchanges. By mid-August on the North American markets, the stock index of member companies listed on the New York Stock Exchange and NASDAQ outperformed the S&P 500 index by 18.8%. These companies are also resilient in volatile markets, recovering early from critical lows. In Europe, WBCSD member companies outperformed the STOXX Europe 600 Index by 5% during the recession. In the Asian market, as of late April, sales in China and India exceeded their benchmarks by 7.5% and 9.4%, respectively. In Japan, as of March, when the Nikkei Stock Average hit the lowest level since the beginning of the year, the average value of WBCSD member companies was higher than the average, and it can be said that they were relatively able to reduce risks (ⅳ).

With regards to the post COVID-19 economic recovery, the concept of "Green Recovery" or "Sustainable Recovery" has emerged. These concepts aim to realize a green and sustainable recovery from the economic recession post COVID-19, as opposed to a brown economy that sacrifices the environment, and to move to a more sustainable society.

European and other governments have announced green recovery policies. In Japan, the Ministry of the Environment announced that they will promote the resumption of economic and social activities on three axes: the transition to a decarbonized society, a circular economy, and a self-reliant, decentralized society. In this September, the Ministry of the Environment and Keidanren(Japan Business Federation) announced the plan of "Redesigning the Post-COVID-19 Economic and Society for a Virtuous Cycle of Environment and Growth -Agreement on Cooperation between the Ministry of the Environment and the Keidanren for Realizing a Decarbonized Society”(ⅴ) .

Interest in “Green Recovery” and “Sustainable Recovery” is expanding also among investors and private enterprises. The United Nations Environmental Programme Finance Initiative (UNEP FI) and Investor Agenda, an initiative towards a net-zero economic in which PRIs, CDPs, investor groups, etc. participate, announced a statement calling for sustainable recovery from the COVID-19 crisis(ⅵ) . CEOs of 155 major global corporations also signed a statement calling for governments to achieve a green and sustainable economic recovery(ⅶ) .

In this way, the promotion of a transition to a sustainable society during the economic recovery from COVID-19 has become a global trend. It can be said that the role of sustainable finance during and post the COVID-19 era is becoming increasingly important.

In the next column, we will cover “Basics about sustainable finance for individual investors”.

Strategic Projects Section, Strategic Projects Division Office of the Governor for Policy Planning Tokyo Metropolitan Government