The world of finance might often seem quite removed from discussions around sustainability, but in fact sustainable investing is a concept that has gained considerable traction over the past few years, with many major companies placing Environmental, Social and Governance (ESG) factors at the heart of their operational principles.
While traditional investment strategies might focus purely on profit and returns, sustainable finance looks at a holistic range of additional priorities, such as helping to build a better world, reducing damage to the environment and society, and creating long term sustainable opportunities for all. These goals are captured within the ESG model which many companies are electing to adopt.
Environmental factors encourage investors to consider how companies manage their impact on our planet, through issues such as greenhouse emissions, waste and pollution, resource depletion and deforestation.
Social factors reflect how a company manages relationships with employees, clients and the wider community, on issues such as human rights, development and treatment of staff, stakeholder health and safety and oversight of the company’s supply chain.
Governance considers how easily a company might be held accountable for its actions by looking at the diversity and structure of their Board of Directors, their business ethics, accounting standards, culture, transparency and regard for shareholder rights.
Sustainability, in all its forms, is becoming a focal point for capital market investors and issuers alike. According to the HSBC Sustainable Finance and Investing survey carried out in 2019, 94% of investors consider ESG important.
This is why so many companies today are looking at how they can implement ESG factors as a way to supplement and complement profitability. In the long term, overlooking these factors can not only threaten the supply chain, but could also put a company’s goodwill and stock price at risk.
A study conducted by Barclays in 2018 shows that Millennials (those under the age of 40), are particularly concerned about environmental and social issues. In fact, 43% of respondents under the age of 40 had invested in sustainability themed instruments compared to 9% of those aged 50-59 and 3% of those aged over 60. The reasons behind this can vary, but more extensive education in school syllabuses and concern around climate change can be considered as key contributors.
Advances in technology are also contributing to the cause. Electric vehicles, accompanied by significant advancement in battery technology, are one typical example. Driven by increased awareness on environmental concerns, a study by Bloomberg NEF states that sales of electric vehicles are expected to increase by 90 times between 2015 and 2040, and account for 35 per cent of total car sales.
Regulation is also playing a very important role in sustainable finance, acting as a key driver for responsible investment as policy makers and regulators seek to put the global financial system on a more sustainable footing and address the long term challenges of climate change and global inequalities. As an example, the European Commission launched its Action Plan on Financing Sustainable Growth in March 2018. The Action Plan aims to deliver upon the commitments that the EU made at the Paris climate conference in December, 2015.
Whilst a significant amount of public investment has already gone into green initiatives, the EU and EU National Governments recognise that if funding requirements for such initiatives are going to be met, then significant private investment will also be necessary. The EU’s Action Plan therefore aims to reorient private capital flows towards sustainable investments, to meet its climate and energy targets. Regulations to help the EU to deliver on its Action Plan will be phased in over a number of years.
The EU Green Finance regulations apply to a wide array of financial market participants such as investment firms, fund managers, insurance undertakings and pension providers. The key initiatives from this programme reflect the EU’s commitment to sustainability and low carbon transition agenda. A series of regulations and directives are expected to be rolled out as from March of 2021, with the application of the Disclosure Regulation. The Taxonomy, Low Carbon Benchmark Regulations as well as the ESG Updates to MIFID II, AIFMD and UCITS Directive will follow suit in the years to come.
As we have outlined above, a wide variety of forces and factors are aligning towards the ultimate goal of making sustainable investing not just the preference but the norm, contributing to the long term benefit of investors and communities alike.
Companies with good ESG performance tend to have better corporate governance, and hence the advantage of long-term sustainability. Integrating ESG factors into the process of investing not only brings benefits to society, but also effectively manages risks, and creates opportunities for investors.
As we continue to monitor changing consumer habits, it seems clear that ESG sustainable brands and companies are significantly more likely to be well placed to seize long term opportunities in the future.
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This article was written by Konrad Borg Myatt, CEO of HSBC Global Asset Management (Malta) Limited. It first appeared in The Times of Malta on 3 August 2020.