Thousands of prominent business leaders, heads of state, entrepreneurs and innovators are gathering in Davos, Switzerland for the 50th annual World Economic Forum, where sustainability and other environmental, social and governance (ESG) issues will be the primary focus. While ESG is becoming mainstream in the U.S. after years of maturing in Europe, this year may be the “tipping point” for ESG, according to Nasdaq President and CEO Adena Friedman.
“Last year, I predicted that 2019 would be a big year for the emergence of ESG, and there were real signs of progress – particularly as ESG decision-making rose to the Board C-suite level across many industries,” Friedman shared yesterday in a LinkedIn post ahead of Davos. “2020 is increasingly looking like it may be the ‘tipping point’ year for ESG investing.”
Friedman noted the recent surge of capital into ESG-related strategies, with Morningstar data showing record net inflows of approximately $18 billion into ETFs and mutual funds for 2019. Furthermore, companies are starting to incorporate sustainability into their core business models. Most notably, BlackRock – the world’s largest asset manager with about $7 trillion assets under management – announced several unprecedented initiatives to place sustainability at the center of its investment approach – a significant shift that could have wide reverberations for companies globally. These measures include making sustainability integral to portfolio construction and risk management, exiting investments that present a high sustainability-related risk and launching new investment products that screen fossil fuels.
“Because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself,” wrote BlackRock Founder and CEO Larry Fink in his annual letter to chief executives of the world’s largest companies. “In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.”
“If a fundamental realignment of institutional capital takes hold, the magnitude of funds that could be shifted as a result could move the needle in the global effort to combat climate change much faster than many are now expecting,” said Freidman. “2020 could be a monumental year for both profits and purpose.”
The theme of this year’s meeting is “Stakeholders for a Cohesive and Sustainable World.” World Economic Forum Founder and Executive Chairman Klaus Schwab teased this year’s event by launching a new Davos Manifesto, which underscores that “the purpose of a company is to engage all its stakeholders in shared and sustained value creation.”
“Yet as we look ahead to a new year and a new decade, it’s far from clear that our world can be described right now as either cohesive or sustainable,” said Friedman, calling out a range of geopolitical risks – from Brexit to a divisive U.S. presidential election and growing geopolitical tensions in the Middle East.
Still, she remains optimistic for the year ahead as markets remain strong and the pace of tech-driven innovation continues at an exciting pace.
“As we look forward to 2020 and emerging technologies, we expect machine learning and cloud computing to come more and more into the mainstream of the capital markets infrastructure. These technologies will continue to amplify machine-to-machine communication (M2M), the platform economy, and business in real-time,” said Friedman.
As these emerging technologies flood into the financial industry, market regulators are struggling to keep pace, according to Friedman.
“The consequence of asynchronous advancements of the markets vs. market regulation can expose investors and companies to uninviting and potentially unfair markets,” Friedman said. “As I wrote in The Economist’s World in 2020 special issue, governments need to take this issue more seriously.”
However, with progress on proxy reform and market infrastructure in the U.S., and she thinks that this year could “bring the start of structural market reforms that will benefit investors.”
“There’s a real sense that 2020 is a crossroads year,” Friedman concluded. “Risks are present, but opportunities abound as well. The world’s capital markets have a responsibility to help shape the global economy by taking a leadership role in embracing the trends across technology, regulation, culture, and societal impact and shaping their impact in 2020.”
Be sure to follow our Davos 2020 page for more updates, videos, and photos throughout the week.