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Men in Suits

ESG is a revolution, not a bubble

ESG popularly stands for Environmental, Social and Governance. One is well aware of the havoc that these three terms have created globally. ESG has become the cynosure of the corporate world’s eyes and this kind of attention is definitely not without a reason. Some may like the ESG trend, and some may dislike it, but certainly, nobody can ignore it. Many argue that it is just a fad and does not carry any substantial value. On the contrary, many believe in the revolutionary nature of the buzzword. So, is ESG really a revolution or simply a bubble?

We are of the opinion that disregarding ESG is as good as disregarding climate change. Can anyone deny that our planet is in a perilous state? I think Covid-19 has given us all the bandwidth to evaluate our actions and think about the reasons as to why is there an upsurge in heat waves, untimely weather conditions, droughts, floods and visible climatic disasters. 194 countries wouldn’t have signed up for Paris Agreement if they thought climate change was a bubble. Governments all over the world are enacting and implementing regulations to solve these alarming issues. A number of ESG reporting frameworks have been created to enable companies to pursue ESG assessment and ESG reporting.

Apart from governments, people have become increasingly aware of the social responsibilities that a company holds and its implications on employees if social wellness is not maintained within an organisation. Employee performance is directly proportional to the company’s performance and if employees are not in the right state, the company is bound to suffer. The names of companies like Enron, Satyam, Polly Peck and many others wouldn’t have been erased from good books if their corporate governance was strong enough. Also, on the environmental facet, it is not like one who emits GHGs suffers proportionately. If it had been so, majorly companies would have been at the receiving end of climate disasters. But that’s not the case. Every individual is bearing the consequences of temperature rise caused by emissions at the hands of corporations. There is a saying in the legal world that, not only one who commits the crime is responsible but the one who helps in the commission of a crime is also equally responsible. Given the devastating effects of climate change on the planet and people, it will not be wrong to judge that actions against the environment and investors’ faith are no less than a crime. This is the reason why investors today are choosing the path of Responsible Investing and ESG funds have become so popular.

ESG funds are aimed at investing in companies that are willing to contribute towards a better future through their operations. ESG funds have their eyes on companies that are implementing their impactful ESG goals. These companies could be using effective water management techniques, sourcing their electricity through clean energy, having fair labour practices, having an inclusive environment, having diversity at every level in the organisation or having the best mix of people on the board or having any other sustainability practice in place. A value-driven investment is the foundation of ESG investing. It is a novel investment methodology that can work like a magic formula in the present and future. Thousands of asset managers have signed the UN Principles for Responsible Investment.

The company’s adherence to ESG factors definitely impacts the bottom line. There exists enough evidence to support this. In 2021, out of $10 global equity inflows, around $3 was in ESG funds. And in 2022, 90% of inflows accounted for ESG funds. Between the period of March 2020-21, the Clean Edge Green Energy Index of NASDAQ witnessed triple growth. ESG investing can be observed significantly in the EU region, where the EU Green deal has played a crucial role in post-pandemic economic recovery. Companies today are compared to each other on ESG metrics, commonly known as peer benchmarking. According to data received by MSCI, Sustainalytics and Refinitiv, the stocks that enjoyed the best ESG scores performed 20-30% better than those with the least scores. The sale of Electric Vehicles (EVs) saw a boom of around 45% in 2020 when the automobile sector, in general, was not performing well. If we glance at the world’s largest ESG-flagged Exchange Traded Funds (ETFs), the investor would be assured that his money is going the right way as prominent names like Amazon, Microsoft, Apple and Facebook account for its top holdings. ESG-themed funds also attracted a big noise in 2020 when three major pension funds of the world, namely Japan’s $1.56 trillion Government Pension Investment Fund, California’s $275 billion State Teachers’ Retirement System fund and the UK’s $90 billion Universities Superannuation scheme committed to sustainable investing by putting ESG metrics at the centre of their assessment tool. Government-led initiatives have given an edge to companies to adopt technological inventions in the green space. Estimation by Moody’s Analytics brings forth an eye-opening fact that climate change alone has the potential to destroy wealth amounting to $69 trillion by 2100.

It can thus be concluded that ESG funds make more economic sense. Companies that have a good ESG score are better positioned to yield long-term returns, have less risk attached to them and enjoy much more investors’ confidence. All of this points to the revolution which certainly will be seen.

You can now understand the revolution that ESG is bound to bring to the world through our famous Directors’ Institute ESG expert certification and bring this revolution via your board room through our Directors’ Institute- World Council of Directors

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