Familiar with the term Responsible Investment (RI), environmental, social, and governance (ESG), social responsible Investing (SRI) or green investing (GI)? My guess is yes. These jargons and acronym-filled commentary has been all over the media in the recent years alarming investors to make their investment decisions within an acceptable investment framework of “socially responsible investments”. The three key pillars to consider are environmental, social and governance or simply “ESG” as it’s commonly referred to
The considerations for each category are not limited to but include as examples:
• Environmental: waste and pollution, greenhouse gas emissions/carbon footprint, supply chain impact
• Social: employee/industrial relations, safety and privacy practices, community engagement
• Governance: board diversity and composition, independence and tenor, executive remuneration
Below are few examples of ESG issues
Where did it all began?
ESG investing began with a letter and call to action. In January 2004, then UN Secretary-General Kofi Annan wrote to the CEOs of significant financial institutions to take part in an initiative to integrate ESG into capital markets.
So, where are we today?
Since then, ESG has evolved to become a key component in the forefront of decision-making for asset managers and institutional investors. Increasingly, ESG considerations are being integrated into the charters of a growing number of entities, included in their practice and applied to the due diligence process when assessing assets to be acquired. Consider the numbers: According to KPMG, in 2017, ESG investments grew 25 percent from 2015 to US$23 trillion, accounting for about one-quarter of all professionally managed investments globally.1
This growth was fuelled in part by the rise in the Socially Responsible Investment Movement more broadly, which is also impacting company behavior with respect to ESG.
So how does it work?
Zin simple terms, sustainable investing or as commonly known as socially responsible investing, is the process of incorporating ESG factors into investment decisions. Individuals who invest sustainably choose to invest in companies, organizations and funds with the purpose of generating measurable social and environmental impact alongside a financial return. Impacts are spread across various sectors, from renewable energy and climate change, to health, safety and community development
Sustainable investing enables individuals to select investments based on values and personal priorities. Initially, sustainable investing negatively screened companies and industries, which often led investors to sacrifice returns for value-aligned investment choices. In recent years, however, investors have used positive screening of ESG risk factors to create a modern “best-in-class” investment approach that generates performance that is in line with—and often exceeds—market benchmarks.
Providing sustainable investing opportunities enables firms to not only capture financial returns for clients, but also to realize intrinsic returns not replicated elsewhere. These intrinsic returns lead to deeper connections between the clients and their investing habits, creating long-term customer appetite (“The Rise of Responsible Investment”, 2020)
How can I be an ESG Investor?
It’s not only the financial outcomes of an investment that would interest you, but also the impact of your investment and the role your assets can have in promoting global issues such as climate action. One demographic that is particularly attracted to ESG investing is millennials and Generation X.
There are few ways you could be a part of responsible investing as an Investor. Before investing in an ESG fund, company or a start-up, it is important to read the organization’s policy statement to understand their criteria for selection.
“Just because it has ‘ESG’ in the title, it doesn’t mean it meets your definition of ESG,”
Some of the SRI strategies includes:
Positive or ‘best-in-class’ screening – or investing more in companies that have high ESG attributes;
Norms-based screening – cutting exposure to firms that don’t comply with international ‘best practice’ standards produced, for example, by the United Nations;
Sustainability-themed investing – such as ‘green’ technology;
Impact investing – typically private equity investments targeting a specific social goal; These include but not limited to activities including access to education, energy, water or healthcare; affordable housing; renewable energy; and microfinance.
Corporate engagement – where funds or companies use their power as shareholders to push for change in company behaviours.
Article by Buddhima Wickramarachchi