When did the ethical and sustainable investment strategy become a serious consideration for shareholders, investors and asset managers?
The global investment approach of shareholders, investors and investment managers is changing. We are currently seeing the transfer of wealth to millennials, environmental disasters, increased costs and risks, and better performance of operations through sustainable practices.
The importance of environmental, social and governance (ESG) factors in investment decision-making, as noted by the Boston Consulting Group in their recent article; Investors care more about sustainability than many executives realize, with 75% of senior executives at investment firms seeing ESG factors as materially important to their investment decision. The disconnect is clear: only 60% of companies have a sustainability strategy and only 25% have developed a clear business case for sustainability.[1]
ESG incorporates a wide range of impacts on the risk and return values of an investment. These issues may be related to regulatory changes, business ethics, or direct impacts on financial, operational, strategic, or reputational risks. Examples of such risks are:
Environmental: natural resources, waste, climate change, pollution and clean technology.
Social: health and safety, local community, human rights and human resources.
Governance: compliance, regulation, reporting, conflict of interest at the employee, shareholder or board level.
The transition from purely fundamental investment approaches, to consider the medium and long-term impacts of our business decisions on the environment, social and governance will affect the market of small and medium companies, suppliers, manufacturers, supply chain, agribusiness , health care, large corporations. and listed companies to multinationals. Investment and capital flows are what drive our economy and the complex ecosystem of the global economy understands the value of sustainable ESG where they want to invest their funds.
The Australian market has generally found it difficult to agree on how to assess environmental, social and governance business policy and often does not see it as cost-effective. ESG reporting in Australia was until recently not a major process for publicly traded companies, and investment in internal ESG risk reduction strategy was minimal.
The range of environmental impacts on businesses and their operations can vary significantly, and some organizations are better placed to take advantage of them than others. Quantifying environmental risk is a challenging process in terms of monetary value, however the transition to a low carbon economy is a key driving force. Achieving a low carbon economy requires investments to improve operational efficiency in the use of energy, waste and water through the use of clean technologies.
Social impacts and risks require an analysis of immaterial characteristics of a business that are not found on a balance sheet, such as culture, employee productivity, customer relations, health and safety, community involvement and sustainable supply chains. Social business decisions often surround ethics working in tandem with profit. Although it does not usually have a direct impact on business performance, ethics and society are an important process of modern business practices.
External analysis of corporate governance processes can also present its challenges. Corporate behavior, decision-making, and politics require extensive reporting by publicly traded companies, often wrapped in large volumes of data. A clear example of governance risk was the Volkswagen diesel emissions scandal in 2015. In the EY report Tomorrow’s Investment Rules: How Global Institutional Investors Are Using ESG to Inform Decision-Making in 2015, (2015) mentioned that ‘nearly two-thirds of respondents believe that companies do not adequately disclose ESG risks.'[2]
Harvard Sustainability Review, (2012), made a direct comparison between High Sustainability organizations and Low Sustainability organizations of similar size, operations and sectors. “In particular, we tracked corporate performance over 18 years and found that high-sustainability companies outperform low-sustainability companies in both stock market and accounting performance.”[3]
The opportunity to improve ESG performance is crucial for both private and publicly traded companies. Investments in sustainable practices improve long-term bottom line performance, mitigate risk, and now represent a significant part of the business. Although investor-driven, companies need to realize the importance of comprehensive ESG reporting, creating a sustainable strategy, and building an ethical company culture. The educated and ethical investor and consumer of the 21st century is here, and they see value in sustainability.
[1] Unruh, Kiron, Kruschwitz, Reeves, Rubel, Meyer Zum Felde, GU, DK, NK, MR, HR, AF, 2016. Investors care more about sustainability than many executives realize. 1st ed. Global: Boston Consulting Group.
[2] Bell, Gordon, MB, JG, 2015. The Investing Rules of Tomorrow: How Global Institutional Investors are Using ESG to Inform Decision Making in 2015. 1st ed. Worldwide: Ernst and Young.
[3] Eccles, Ioannou, Serafeim, REIIGS, 2012. The impact of corporate sustainability on processes and organizational performance. 1st ed. United States: Harvard Business School.