ESG Investing: Putting your money where your value is

Who watched Sir David Attenborough’s Extinction: The Facts? If you did then you might be thinking a bit more about how you can do your part to help our planet. Whether lack of biodiversity is partly to blame for Coronavirus is not for me to say but there is absolutely no doubt that everyone, everywhere can do more to help sustain the environment we live in.

At an enterprise level, Environmental, Social and Corporate Governance (ESG) values are more important than ever. ESG refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business. These criteria help to better determine the future financial performance of companies (return and risk). This couldn’t be more relevant than in the energy and commodity sector who are directly responsible for producing green energy and more sustainable ways of production.

ESG is a fairly new concept, but it is showing no signs of dissipating. The FCA (Financial Conduct Authority) released a paper in March 2020 outlining their ‘Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations’. So, in the UK there is imminent pressure for firms to standardise their reporting around ESG. A recent survey by S&P Global found that 86% of credit risk professionals questioned said that their firms are demonstrating a commitment to ESG by having dedicated internal resources in place. But whilst ESG is stealing column inches and Sir Attenborough is forcing us to think about these important issues the same S&P Global study found that only 9% of those questioned said that 20% of their investments were in sustainable funds.

If you look overseas to the Asia Pacific region there is clear evidence that they are recognising not only the regulatory pressures to invest in ESG but in fact there are clear business benefits driving this agenda.

Responsible investing policies can deliver:

  • Improved long term returns
  • Improved brand image and reputation
  • Identifying credit quality changes of counterparties / investments
  • Decreased investment risk
  • Talent attraction

Traditionally ESG investing may have limited your choices, but those days are fading. Most believe now that ESG-minded business practices gain more traction. In a recent study from Trucost they addressed “Does sustainable investing come at a cost?”. The results found that, on carbon-sensitive portfolios, the results suggest that companies with the lowest greenhouse gas (GHG) emissions per $1 million of revenue are, on average, more profitable than those with the highest GHG emissions per $1 million of revenue. Financial services companies such as JPMorgan Chase, Wells Fargo, and Goldman Sachs have published annual reports that extensively review their ESG approaches and the bottom-line results.

But it is still very early days and there is a long way to go to streamline and improve the methods by which we consider ESG. Especially the social aspect. Whilst there are some transparent measures there is a lot more to consider, what we do have in our favour is masses of data. Social media has become incredibly prevalent and if we can find ways to harness this unstructured data then there will be clear sentiment indicators to feed into the models. Read our paper: The Importance of Social Media in Risk Management.

I hope that every individual realises the importance of protecting our planet and how we all have a role to play, and if you don’t then take some time and watch Sir Attenborough’s show. For organizations there are considerations, risk, cost, reputation, technology this list goes on… But I think we can all agree that no longer is it just about making a load of money. The poster boys in today’s modern society are the ones who are going the extra mile to look after the planet, the people and carefully consider the way they conduct themselves.