If you didn’t already know – Environmental, Social and Governance issues (ESG) is becoming a popular and progressive way to improve how corporations behave. In 2006, the United Nations’ Principles on Responsible Investment (PRI) allowed ESG to become a mainstream initiative. Another ESG win came in 2015 with the Paris Climate Agreement, which was signed by 195 countries. With this global recognition came a greater level of transparency within financial institutions. This meant that companies were compelled to disclose details to their investors about their best practices, such as employee and environmental policies, without investors needing to ask about them directly.
Some of the major issues in the today’s global economy that fall under the ESG investment umbrella include:
- Wealth inequalities and stagnant wages
- Tax avoidance by global corporations
- Monitoring and surveillance practices by tech companies
- Lack of human rights in the workplace
- Destroying the environment
The growth of ESG was further highlighted in George Serafeim, Mozaffar Khan and Aaron Yoon’s 2015 Harvard Business School study. Here, the trio revealed how firms can reap the socially responsible rewards by investing with a social conscience. These rewards included higher share prices, sales, and profits, in contrast to their competitors and peers.
It’s no surprise that the ESG investment ethos is open to abuse, in which firms use their ESG affiliation with the sole intent to attract further investments – without being genuine or responsible about their actions.
However, there is a solution that investors have stumbled across. If ESG regulations are followed, it will benefit businesses by bolstering their industry reputation and improve how the company is valued by their investors. Naturally, as a by-product, it will enhance sustainability too.
The danger of “greenwashing”
While impact investing is a positive, forward-thinking approach to balance an environmental or social impact (with profit too), the biggest concern is making sure the responsible behaviour required to represent an ESG investment fund is clearly communicated throughout the industry. In our chat with Mandy Kirby at Principles for Responsible Investment (PRI), the Director of Reporting, Assessment & Accountability spotlights the regulatory pressures for sustainability. This opaque area is where “greenwashing” is in danger of flourishing. Should businesses or investors attempt to embellish or fabricate their involvement with ESG to gain a greater support from investors – this is a prime example of a “greenwashing” no-no.
Surely this can be regulated? The Bank of England and the Financial Stability Board are doing just that with a climate-related financial disclosure initiative, which is in place to report on any financial risks concerning climate change. In addition to this, the European Commission will be launching a taxonomy legislation to monitor green assets.
While “greenwashing” dangers pose a threat, we can focus on some of the positives, which are presented in the 2016 statistics published by the Global Sustainable Investment Alliance:
- In total, $23 trillion was responsibly managed
- $15 trillion of this was negative or exclusionary
- $10.4 trillion was directed to ESG strategies
- Impact investing was the smallest but the fastest-growing category
The vision of sustainability for investors
Notably in the UK, pension fund managers were given the opportunity to dump shares from companies who dealt in primary resources (like oil, gas, and coal), if they chose to invest in environmental or social-impact schemes. The vision of sustainability continued in France, with a green bond that required companies to be fully transparent with their policies. These initiatives are beneficial in changing the investors’ perspective – in Europe at least.
Meanwhile, in the US, the Department of Labor declared that ESG investing isn’t necessarily “economically relevant”. Despite this opinion, New York and California’s public sector have decided to forge ahead and promote an ESG future.
Source: Raconteur. This article was originally published on Raconteur.net