10 Nov Environmental Social and Governance (ESG) Investing – The Way Forward
By Jamila Sealy
ESG investing, also known as “sustainable investing” or “impact investing” refers to a type of investment which prioritizes environmental, social and governance (ESG) factors or outcomes. ESG factors are therefore non-financial performance indicators that investors use to assess a company before making a decision to invest. Consequently, a company’s ESG strategy i.e. their corporate governance policies, disclosure practices, procedures and safeguards relating to ESG issues, can have a significant impact on investors as investment trends continue to evolve and shift toward sustainable investing.
This trend is largely attributed to the way governments, organizations and individuals are responding to environmental, social and economic issues such as climate change, gender equality, human rights and diversity. In light of these issues, the statistics indicate that investors are inclined to invest in companies and products that support and promote these causes and share their values. This notion has been met with increased action on ESG issues by many global organizations, including Apple and Coca-Cola, to reflect these changes in societal norms and values.
This development was particularly noted during the COVID-19 pandemic where there was significant growth in ESG investments despite the disruption and uncertainty in the market. According to Bloomberg Intelligence, ESG assets surpassed 25 trillion USD in 2020 in the height of the pandemic and is anticipated to hit 50 trillion USD by 2025, indicating that ESG investing just may be the way forward.
Factors to consider when investing in ESG assets
ESG criteria refer to a set of standards that help investors find companies with values that match their own. This criteria can also be used by investors to avoid companies that might have a bigger financial risk due to certain environment or social practices. This criteria is generally broken down into three components: environmental, social and governance which reflect certain causes or issues that may influence an investor’s decision. The criteria is outlined in further detail below:
- Environmental – Environmental criteria refer to how a company performs as a steward of nature. As such, this criteria measures the impact that a company has on the environment. It takes into consideration factors such as pollution, carbon emissions, green energy initiatives, deforestation, water usage and waste management.
- Social – Social criteria assesses how a company manages relations with employees, suppliers, customers and the communities where they operate This includes company policies on employee gender and diversity issues, as well as customer satisfaction, data security, local and global human rights and fair labour practices.
- Governance – Governance criteria deal with a company’s leadership and measures how policies and actions of a company’s management and board of directors drive positive change. These criteria include executive pay, diversity of board members, transparency and disclosure.
ESG Reports & Ratings
In addition to the ESG criteria mentioned above, investors should pay close attention to ESG Reports and Ratings to assess and measure a company’s ESG performance over time, before making an investment. These reports and ratings are designed to help investors understand the ESG risks and opportunities associated with certain companies by collecting data on companies based on their ESG polices, systems and measures. There are currently several ESG report and rating providers such as Bloomsberg ESG Data Service, DowJones Sustainability Index (DJSI), MSCI ESG Research and Sustainalytics Company which can be relied on when making ESG investment decisions.
Advantages of ESG Investing
Apart from the environmental, social and governance benefits associated with ESG investing there are also several practical advantages which include:
- Reduced Risk
Investors interested in ESG investing are often looking to avoid companies that have dubious business practices. These companies generally have higher rates of failure which may affect the potential return on investments. Consequently, by focusing on sustainable investing, investors can reduce their risk of suffering potential losses.
- Better Returns
ESG investing tends to lead to higher returns in the long run as investors choose to invest in companies with sustainable business practices that they trust. As such, these investors can invest their money with greater confidence in these companies as their investments are more likely to succeed and achieve a higher return based on their ESG performance.
- Market Outperformance
Companies that focus on sustainable business practices frequently outperform their competitors over time as a result of their stronger reputations, brand loyalty, increased market share, increased profits, and better revenue growth prospects. These factors contribute to the overall success and return on ESG investments.
ESG developments in Trinidad & Tobago and their impact on ESG Investing
In T&Ts Vision 2030, the government places specific emphasis on strengthening the environmental governance and management systems in T&T, where environmental issues such as climate change, the use of renewable sources, waste management, water, food and energy security will be addressed. The strategic initiatives highlighted in this regard include a comprehensive review of environmental policy and legislation in relation to international best practices consistent with the UN Sustainable Development Goals (SDGs).
Keeping with the vision, these reforms will inevitably transform the way the business community operates in T&T as more value is placed on ESG issues. With environmental policies and legislation in place, companies will be more apt to comply with emerging regulations and investors, more inclined to invest in the businesses that promote and support these sustainable practices. As such, with these initiatives on the way, we can expect some movement toward ESG investing in the local market which supports the view that ESG investing may be the way forward.
In addition to Vision 2030, there have been recent ESG developments in the private sector where companies have already embarked on adopting sustainable practices. In July 2022, ANSA Merchant Bank in Trinidad and Barbados and ANSA Bank launched a Caribbean Natural Capital Hub in partnership with the Cropper Foundation and the Capitals Coalition, to pioneer the first, private sector led, Natural Capital Report in the Caribbean which will explain and document, the economic and financial value of the impact on the capital assets of the region. This initiative will be of significant value to those interested in ESG investing as it gives rise to an emerging form of accounting which considers the worth of ecological assets as well as a form of sustainability reporting which will assist investors when making their decisions to invest in ESG products and assets.
Based on the discussion above, it is apparent that there has been a shift toward ESG investing and the development of sustainable practices which may be indicative the way forward.