The Mainstream Mission for ESG is Honorable Investing
ESG investing or Environmental, Social, and Governance is not a new concept, but recently beginning to show long-term profit and sustainability for investors. ESG criteria is a set of standards that companies can abide by when vetting lucrative investment opportunities. Investors first look at the environmental elements of a company’s structure, asking questions about environmental impact and risk, focused on climate change, fossil fuels, carbon emissions, and water. Social impact is also a component of ESG and spotlights human rights, employees, and relations with consumers. The third and final tier of ESG criteria is governance. Governance practices are viewed closely and target ethics, board practice and structure, and board diversity.
2015 was a pivotal year for ESG investing with the global adoption of the United Nations’ 17 Sustainable Development Goals and the Paris Climate Accord. The world watched as governments committed to ambitious environmental goals, which Quartz reports will take $5-7 trillion every year through 2030 to reach. Likewise, companies began to take up the torch of social responsibility and started to look to a future of ESG investing. “Banks have altered their policies on financing to fossil-fuel projects, such as deepwater oil drilling or tar sands oil extraction. There is also the development of gender-lens investing, with exchange-traded funds (ETFs) that invest in companies committed to gender equality…In general, adherence to environmental, social and governance criteria…is becoming more commonplace,” says Quartz. Pictet Asset Management forecasts that ESG assets will make up around two-thirds of assets managed by global funds by 2020. This is up from half in 2016.
ESG Investing and Risk Management
ESG criteria are often used as a tool to exclude certain industries, countries, products, or services from investment portfolios and manage risk. “Apart from the ethical component, ESG standards are developed to help investors avoid firms at risk of suffering tangible losses as a result of their ESG practices,” says Investopedia. “A company might face environmental risks related to its ownership of contaminated land, its disposal of hazardous waste, its management of toxic emissions or its compliance with the government’s environmental regulations.” The BP oil spill in 2010 and Volkswagen’s recent emissions scandal are evidence of tangible risks. These environmental errors caused falling stocks and billions of dollars in losses.
Intangible assets are also at stake for companies who fail to abide by ESG investment criteria. Forbes reports that a new study by the Society of Corporate Governance highlights intangible asset risk, which can make up more than 80% of a company’s value. “The intangible assets that could be subject to ESG concerns include brand names, reputation, top managers, technological know how and a loyal, well-trained and engaged workforce.” Intangible assets such as brand identity are at the forefront of a company’s vision. Recently, Starbucks stated they would eliminate all plastic straws by 2020 to stem the tide of ocean plastic. Starbucks is replacing straws with a polypropylene lid that can be easily recycled. “By nature, the straw isn’t recyclable and the lid is, so we feel this decision is more sustainable and more socially responsible,” said Chris Milne, director of packaging sourcing for Starbucks. The coffee conglomerate is also proactive in investing in environmentally sustainable companies to improve their products and initiatives that continue to bolster customer and employee loyalty.
Making ESG Investing Mainstream
ESG investing sounds like a dream for sustainable start-ups, the environment, and the overall health of our planet. However, Wall Street investors are slow to back the movement citing slow and underperforming long-term investments. “Over time, ESG…strategies have not proven to be performance winners,” said Vanguard Investor Dan Wiener. “They may allow their investors to sleep better at night from a social-conscience point of view, but they aren’t going to put money in your pocket, they aren’t going to give you more money to direct towards the social, environmental issues that matter most to you, and they haven’t had much of an impact, if any, or corporate governance practices.” Also, ESG investing is often viewed as subjective to company values, limited opportunities, and lack of data to back up positive return on investment.
The most recent data from The Forum for Sustainable and Responsible Investment tells a different story. In 2016, $8.72 trillion in United States assets qualified as social and impact investing. This total is up from less than $7 trillion in 2014 and $4 trillion in 2012. In addition, Institutional Shareholder Services launched the Environmental & Social QualityScore in February 2018, which “represents a data driven approach to measuring the quality of corporate disclosures on environmental and social issues, including sustainability governance.” This high-quality data-driven analysis will aid in responsible investment portfolios. “Instead of looking at ESG factors as a soft and vague measurement of what kind of corporate citizen a company is, the mounting data related to environmental impacts and social issues are increasingly being measured right alongside such things as cash flow and earning on the balance sheet,” reports InvestmentNews. Sonia Kowal, president of Zevin Asset Management, a firm that exclusively builds ESG investing portfolios continues, “In general, companies with the strongest records on employee relations and environmental sustainability, for example, often have better financial performance over the long run than those with the weakest records.”
Looking to the Future
Although ESG investing research and data analysis are becoming more fashionable in corporate governance trends, change happens slowly in the investment world. Quartz reports that Sustainalytics began scoring companies on their exposure to fossil fuels and their risk as we make a global transition to low-carbon enterprises. As of July 2018, New Jersey began taking strides in ESG investing, as well. The state withdrew its holdings in all automatic and semi-automatic firearms companies in response to the nationwide devastation of mass shootings. They also are putting pressure on private equity firms foreclosing on Puerto Ricans affected by Hurricane Maria and advising Target not to work with trucking companies who use drivers as contractors rather than employees. ESG investing is also getting a push from younger consumers, specifically Millennials. Capital Intelligence Associates Inc. reports, “…30% of our clients are invested in ESG strategies, but about 70% of our new clients are investing in ESG. It’s the fastest-growing part of our practice.” The growing popularity and push for global environmental, social, and sustainable investing may encourage mainstream opportunities for companies worldwide.
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