The year began innocently enough with the growing debate over corporate purpose. Should corporations continue to view their purpose primarily in terms of maximising shareholder value, or should they view purpose in broader terms, recognising their obligations to other stakeholders and society?

Then two unforeseen events, the global pandemic and the murder of George Floyd, underscored the importance of the stakeholder-capitalism model, which focuses on creating sustainable long-term value that serves all stakeholders and creates positive societal impacts. This, more than anything, is the ultimate purpose of sustainable investing: to weigh in with investment capital in support of the stakeholder model.

The pandemic: Companies that prioritised stakeholders were more resilient

Given the gravity of the pandemic, companies had no choice but to prioritise their stakeholders. The effects of corporate responses to the pandemic on workers, customers, and communities were closely scrutinised in media and by organisations like JUST Capital, which created the COVID-19 Corporate Response Tracker. JUST Capital found that firms it assessed as doing the best jobs prioritising workers had more resilient stock returns than those doing the worst. Researchers at Harvard found that firms generating positive public sentiment about the way they responded to the pandemic and their effects on employees, suppliers, and broader society outperformed their counterparts during the market collapse in the first quarter.

This focus on corporate responses to the pandemic created greater awareness among investors for the importance of the "social" dimension of environmental, social, and governance analysis. Most professional ESG analysis emphasises these areas, particularly in industries and for companies where they are most material to financial performance, but many end investors have had the impression that sustainable investing is mostly about the "environmental" dimension of ESG, especially climate change.

Sustainable equity funds, in general, proved themselves to be resilient in a down market, something many of them hadn't had an opportunity to demonstrate prior to the pandemic. This is important not so much because the actual returns of sustainable funds were massively different from those of conventional funds--they weren't--but because the outperformance of sustainable equity funds appeared to be attributable as much to their emphasis on companies with stronger ESG credentials as they were to their sector weightings. While energy underweights helped during the first quarter, ESG stock selection has been the biggest positive factor throughout the year, especially outside the United States.

Racial justice: Investors have a role to play in fighting systemic racism

The events of the summer highlighted the urgent need to address systemic racism in the US Indeed, as Calvert Research and Management CEO John Streur wrote in June, "Ending racism is a responsibility of corporations, and corporations must recognise that their current effects to promote their core values, and diversity and inclusion programs, fall far short of what is needed today."

Through engagement and proxy voting, sustainable investors can push for change at the corporations they hold in their portfolios. Sustainable investors press companies on their diversity and inclusion policies, on the composition of their boards, on the way they compensate employees—particularly lower-wage workers whom we are more fully recognising as essential during the pandemic, on labour relations generally, and on where corporate lobbying and political expenditures go.

Over the next year, you can bet that sustainable investors will closely question what corporations are doing to fight systemic racism. BlackRock, for example, announced last week that it will ask US companies to disclose EEO-1 data on workforce race, gender, and ethnicity. This information is required by the US Equal Employment Opportunity Commission, but companies are not required to make it public.

Investors can have a significant impact on corporate leadership, especially when investors are aligned with other stakeholders and the public. Lending the weight of your investments to the cause of greater corporate responsibility and stakeholder capitalism is one important tool for change you have at your disposal.

As I wrote in June, investors have the means to drive change. An all-out attack on systemic racism requires every tool in the box.

The US election: A more positive environment for sustainable investing

First, President-elect Joe Biden's approach to climate change will realign the US with the Paris Agreement and the rest of the world. As a result, the transition to a low-carbon global economy, for which sustainable investors are generally well-positioned, will gain momentum.

Second, Biden appointees to the Securities and Exchange Commission and the Labor Department will be knowledgeable about and supportive of sustainable investing, replacing those from the Trump administration who clearly had an axe to grind against it. Biden also has appointed Brian Deese, BlackRock's global head of sustainable investing, to run the National Economic Council. While Deese was chosen for his economic and climate policy work in the Obama administration, he brings a deep understanding of sustainable investing to the centre of economic policymaking in the new administration.

Finally, in terms of specific policies, we will likely see moves by the SEC and Labor Department to roll back Trump administration rules limiting the use of ESG funds in retirement plans and limiting the ability of ESG investors to participate in the shareholder resolution and proxy voting process. In addition, we expect the SEC to move to require public companies to disclose climate-related financial risks and greenhouse gas emissions in their operations and supply chains.

Even without regulatory support in the US, sustainable investing has grown significantly over the past four years. By the end of the year, I expect 2020 flows into sustainable open-end and exchange-traded funds to flirt with the US$50 billion mark. That's 10 times more flows into sustainable funds in the US than in 2018 (last year, flows were just more than US$20 billion). And US SIF: The Forum for Sustainable and Responsible Investment estimates that 1 in 3 dollars of overall assets under management in the US now use some form of sustainable investment strategy. The events of 2020 have further demonstrated the salience of ESG to investment managers and strengthened the rationale for end investors to invest in a sustainable way. 

Jon Hale ([email protected]) has been researching the fund industry since 1995. He is Morningstar's director of ESG research for the Americas and a member of Morningstar's investment research department. While Morningstar typically agrees with the views Jon expresses on ESG matters, they represent his own views.