ESG investing: No longer just a green initiative
17 May 2017
By Rana Abdel Fattah
Environmental, Social, or Governance (ESG) investing is no longer just a “green” initiative valued by a small subset of investors. Some of the largest investors in the world, such as BlackRock and State Street, now view ESG as value-creating, and are actively analyzing it across all their portfolios, not just “socially conscious” funds.
According to the Forum for Sustainable and Responsible Investment: sustainable, responsible, and impact investing increased by 137 percent from $3.74 trillion in invested assets to $8.72 trillion in invested assets between 2012 and 2016. Investors are now putting more money towards companies that have a higher green revenue exposure, or are better equipped to fulfill their sustainability goals. As found in the London Stock Exchange Group’s recent report: Your Guide to ESG Reporting, “a company is more likely to attract long-term investors when they publish high-quality information about the long-term implications of their ESG initiatives.”
Investors want to understand how issuers are responding to long-term trends such as climate, technology and politics. And because of this public companies need to communicate the relevance of ESG factors to their business model and strategy and make clear how the company is positioning itself, either to benefit from these factors or to manage the risks associated with them.
ESG investing is becoming mainstream.
Institutional investors have developed a greater appreciation for the value of ESG factors in the past several years and has reached a pivotal point in time: ESG investing has entered the mainstream. According to Ernst & Young’s (EY) 2017 report: Is your non-financial performance revealing the true value of your business to investors? “investors increasingly see that by understanding these risks and benefits, they can avoid the downside and embrace the upside in a valuation that flows from nonfinancial business activities.” Investors are also expecting that millennials — with their views about ESG issues, and the influence gained as an estimated US$30 trillion is transferred to them from their families — will continue to increase the importance of ESG factors in investing.
In fact, investors are starting to look to a company’s nonfinancial performance to help tell a more complete story. In 2016, 68% of the respondents who participated in the EY report indicated that nonfinancial information played a pivotal role frequently or occasionally, up from 52% in 2015 and 58% in 2013 — the proportion of investors relying on nonfinancial information has notably growing.
ESG impacts investor decisionmaking worldwide.
Today’s investors are weary that companies don’t disclose ESG risks that could affect their business and are driven to reevaluate non-financial disclosures and look more closely at available information provided by companies. Last year saw an increased focus on ESG reporting when BlackRock’s CEO sent a memo to the heads of the S&P 500 companies and Europe’s largest corporations telling them to “focus more on long-term value creation rather than short-term dividend payouts; be open and transparent about growth plans; and focus on environmental, social and governance factors because they have real and quantifiable financial impacts.” And many investors across the globe would agree that a great indicator of a company’s operational excellence is how well it can handle ESG issues. Eighty percent of participants in EY’s survey agree that ESG issues have real and quantifiable impacts over the long term success of a business.
ESG information must be timely and well structured.
Chris McKnett, Managing Director and Head of ESG at State Street, gave a fascinating Ted Talk a while back called The investment logic for sustainability, where he says ESG is more important now than ever. According to McKnett, CEOs across industries believe that there’s tremendous opportunity in sustainability. It is why today’s investors are looking for more than just strong financial data when making business decisions — environmental leadership goes hand in hand with good returns. Mcknett believes that “sustainable investing is less complicated than you think, better performing than you believe, and more important than we can imagine.”
Today’s investor is leveraging ESG data to inform capital allocation and investment decision-making. According to the London Stock Exchange: issuers should ensure that the data they provide is accurate, timely, aligned with the issuer’s fiscal year and business ownership model (i.e. aligned boundaries), and based on consistent global standards to facilitate comparability.
However, despite a growing trend in the appreciation for ESG information, investors remain unsatisfied with the quality of information that is made available. In EY’s report, the majority of participants (60 percent) called for issuers to disclose ESG risks more fully.
ESG initiatives pay off for corporations in the long-run.
There’s plenty of evidence to suggest that companies who invest in ESG initiatives see an increase in revenue, lower their capital expenditures, and facilitate high stock return – and most importantly, minimizes their environmental impact. This is exactly what investors and consumers want to see.
DuPont is a great example of a company that has upped its revenue growth as a result of investing in ESG initiatives. In 2011, DuPont set a goal for 2015 to increase its annual revenue from products that improve energy efficiency and/or reduce greenhouse gas emissions by at least $2 billion. By 2013, these products generated $2.5 billion in revenue — increasing the company’s overall revenue growth by 56 percent.
Companies must realize that in addition to actually implementing ESG initiatives, they need to put in place a cohesive program that will pay off in the long-term for both investors and the environment.
Next week, we will share best practices on how companies communicate their CSR / ESG initiatives with authenticity on their websites.