Why ESG is good for your company’s bottom line
24 January 2019
By Allyce Maclaren
In recent years, the trend for environmental, social and governance (ESG) investments has been booming. Alongside the good karma of positive social and environmental impact, it seems that investors and fund managers alike acknowledge the opportunities for positive financial returns. In fact, with its growing convergence with IR and passive investing, ESG is becoming a crucial focus for every IRO’s program.
The story of ESG investing officially started in 2004 when former UN Secretary-General, Kofi Annan, invited CEOs of large financial institutions to partake in an initiative for finding ways to better integrate ESG into capital markets. The follow-up report called “Who Cares Wins” argued that integrating ESG factors into the capital markets makes good business sense, because it leads to more sustainable markets. The UNEP Finance Initiative also released a report emphasizing that ESG issues are relevant for financial valuation.
Today, it’s more clear than ever that besides the feel-good intent of positive social and environmental impact, ESG factors have direct financial relevance. This is in large part because they minimize the risk of exposing your company to lawsuits and negative public perception. A palpable example is Volkswagen’s 2015 emissions scandal, which not only resulted in billions of dollars in corporate losses, but rocked the firm’s stock price.
As a key trend for 2019, here’s a look at what’s driving ESG’s popularity and why exactly it’s so good for your bottom line.
The current landscape
ESG-conscious business practices have continued to gain traction in recent years, as more evidence emerges that ESG issues indeed have financial implications. In line with the growing interest in corporate transparency, the PRI is now a global initiative with 1,600 members, representing $70 trillion assets under management. The SSEI has also grown, with many exchanges now mandating ESG disclosure for listed companies or providing guidance on how to report on ESG. In Europe, for example, the law requires large companies to disclose certain ESG factors in financial reporting – a ruling that affects roughly 6,000 large companies.
According to a recent report on “Sustainable Financing and ESG Investing” by HSBC Holdings, two-thirds of institutional investors and nearly 50% of companies globally have an ESG policy in place. The 1,731 companies and institutional investors in the survey credited stronger brand reputation, financial returns and shareholder engagement to their ESG commitments. The report found that, on average, ESG investments performed 2% higher than the rest of their portfolio.
Currently, ESG investing is estimated at over $20 trillion in AUM or around a quarter of all professionally managed assets around the world. Trillium Asset Management, with more than $2.5 billion in AUM, integrates ESG factors to identify companies positioned for strong long-term performance. Trillium’s ESG criteria includes avoiding investments in firms with known exposure to coal mining, and in firms with greater than 5% of revenues from nuclear power or weapons. The firm also avoids investing in firms with controversies related to workplace discrimination, corporate governance, and animal welfare.
What’s driving ESG’s popularity?
With an estimated addition of 2 billion people by 2050, global demand for food, water, and energy will drive the need for improvements in infrastructure, to tackle the resource needs of a growing population. According to the Global Footprint Network, humanity is using nature 1.7 times faster than our planet’s ecosystems can regenerate. Clean water and sanitation, innovations in energy production and distribution, improved healthcare, and more efficient transportation will undoubtedly offer up plenty of opportunities for sustainable investment growth. Furthermore, as resources deplete, their value will appreciate, meaning good stewardship and carbon practices just make good financial sense.
The Millennial Effect
Millennials (born between 1982 and 2000) are now the biggest generation in the American workforce, and with that comes a shift in demand, as their purchasing power increases. Millennials lead in terms of social-impact investing interest; according to a Morgan Stanley study, nearly nine of 10 Millennials (86%) said they are interested in sustainable investing, compared to 75% of the overall population. And when it comes to retirement, 90% of this generation wants sustainable investing options as part of their 401(k) plans.
Lule Demmissie, Managing Director of Investment at TD Ameritrade says, “Millennials are purpose-driven. They’re overwhelmingly the generation that wants to invest according to their beliefs, especially social and environmental.” She concludes, “For Millennials it’s about making an impact.”
Technology and Big Data
While the demand for ESG information has increased significantly in recent years, new technology has risen to meet the demand. Arabesque S-Ray®, for example, utilizes machine learning and big data to comb through ESG metrics of over 7,000 of the world’s largest corporations for valuable insights on sustainability.
Looking to the future and the bottom line
Given the forces driving the movement, it’s safe to say that ESG investing is here to stay. There are plenty of reasons why doing good can lead to doing well financially: investments in energy efficiency can save money; philanthropic programs can motivate staff; community outreach can aid recruitment. In fact, a recent study that evaluated and managed more than 10,000 funds shows that, “investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments.” Pair this with the fact that we’re witnessing the largest intergenerational transfer of wealth, with the ever-conscious millennial population expected to wield $24 US trillion by 2020. The fact of the matter is that ESG is mainstream. It’s not just critical for our environment and society, but for the IRO’s current and future mandates.
Allyce Maclaren is Q4’s Marketing Specialist and enjoys writing about trends in IR and marketing.