In this article we explore what is ESG Investing?
ESG Investing emerged from The United Nations’ ‘Who Cares Wins’ report in 2004, brought the concept of Environmental, Social and Corporate Governance (ESG) to prominence – suggesting that businesses who carefully consider the impact of their environmental, social and governance policies, could benefit society while using this leverage to support economic growth. Our look at ESG investing, aims to explain the concept in greater depth – while demonstrating how it may define how we do profitable but ethical business in today’s world.
What is ESG Investing?
Three Core ESG Investing Factors
Since the World Wildlife Fund’s (WWF) “Living Resource Conservation for Sustainable Development” report in 1980, the drive towards ESG has gathered pace, through the world’s first “socially responsible” stock index in 1990 (Domini 400 Social Index), the UN’s Principles for Responsible Investment in 2006, and 2015’s Adoption of the Sustainable Development Goals (SDGs) by 193 countries to combat greenhouse gas emission, to mention a few. Data from the Global Sustainability Investment Alliance suggests that in 2020, $30.7 trillion is currently invested in projects using ESG principles*. It’s therefore clear that ESG already has significant penetration, but the concept of specifically investing in sustainable ventures and product development is set to become increasingly adopted, and potentially more and more legally necessary.
Environmental: Carbon emissions, water consumption, pollution, inorganic waste, sustainable building, land management, green energy
Social: Workforce health & safety, whole-chain working conditions standards, privacy and data safety, product compliance, worker developments
Governance: Ethical business, diversity, anti-corruption, political stability control, vested interest transparency, tax visibility
ESG Investing & The Global Opportunity
It’s now apparent that ESG is a global opportunity that will form the foundation of a reset world, which will emerge following the socio-economic tribulations of 2020. Its emergence has been gathering pace since the UN’s Principles for Responsible Investment (PRI) were created, with the goal of infusing ESG concepts into standard investment strategy. Similarly in 2015, the release of the UN Sustainable Development Goals (SDGs) provided 17 sustainable concepts for PRI.
These initiatives have led to many prominent global companies and organisations taking the lead in the implementation of ESG principles.
Supported by advisory bodies, in 2017 the world’s central banks created the Network for Greening the Financial System. This system has the goal of energising capital to specifically support environmentally friendly investment opportunities, those that are green and low-carbon.
In 2018, the European Commission revealed its goal of being carbon-neutral by 2050. This is a prototype for sustainable development, fusing together industrial policy, finance and increasingly more sophisticated technology. The analysis by the Business and Sustainable Development Commission projects that sustainable development goals may generate $12 trillion in business development by 2030.
Businesses such as Deutsche Bank are good examples of large and established companies aligning with the Paris Pledge for Action, and other initiatives such as the Task Force on Climate-related Financial Disclosures (TCFD). The latter identifies the need for companies to create a model of how to analyse the climatic financial risk, to enable the deliverance of transparent information to investors, lenders, insurers and stakeholders.
How ESG Investing Can Support ROI
The core reason that companies cite for resisting investing using ESG principles, is the perceived threat to their return on investment.
However, various organisations in multiple sectors who have created their own ESG principles have successfully, demonstrated that aligning with a conscious development ideology can potentially elicit sustainable business growth and long-term revenue generation, while reducing the prospects of encountering regulatory problems that may emerge as ESG gains more legal standing.
Within the financial services a positive adoption of ESG investing was seen, in December 2017, when we saw six sovereign wealth funds come together to create the One Planet Sovereign Wealth Fund Working Group. Its objective being to develop an ESG framework to address climate change and encourage sustainable growth and market outcomes. The framework was based on three principles: to align climate change awareness and influence investment decision-making; to promote value creation by encouraging businesses to address the impact of climate change, and to integrate the risks and opportunities of climate change in the management of investments.
Implementation of ESG Investing has also been seen within transportation where UPS declared a saving of $400 million annually from its investment in its proprietary sustainability-focused logistics software tool, ORION, that helps delivery trucks significantly reduce miles driven. Since initially deployed in 2013, UPS has avoided driving 210 million miles, saved 10 million gallons of fuel, and reduced CO2emissions by 210,000 metric tons. Going forward, UPS expects to see annual reductions of 100 million miles and 100,000 metric tons in CO2 emissions.
Furthermore, we also saw positive impacts of ESG Investment within the Fast-moving consumer goods (FMCG) sector as Kellogg’s indicated a potential saving of $28 million over ten years (2005-2015) by reducing energy and water consumption. Read more
Private & Commercial ESG Investing
In addition to ESG principles being important ethically for businesses and organisations, private investors and consumers are also increasingly seeking sustainable companies to invest in and buy products and services from. Private banks are a good illustration of brands expected to reset how they operate and the services they offer in the post-Covid world, which will include ensuring that their products are aligned with increasingly environmentally savvy consumers.
As we head into a world of increasingly sophisticated technology, any investment that takes Environmental, Social and Corporate Governance into consideration, is the future.