OLIVER CAMPONOVO INVESTMENTS ESG - Would you trust a company that doesn’t care about employee welfare, gender equality or fair pay policies? Would you invest in a chemical company that makes no effort to mitigate its environmental impact?
Investments also look to the green
In recent years there has been a growing focus on issues related to the environment and human rights, which has also led to a radical change in the financial and investment market.
Companies are asked to take more and more responsibility for their "impact" and to make it as positive as possible, getting to the point, from investors, to evaluate organisations not only on the basis of financial performance but also on the basis of non-financial criteria and the way they manage their risks and opportunities.
In addition, the greater sensitivity to this issue is found in Millennials and Generation Z to the point that some financial analysts and investment managers offer advisory or investment lines dedicated to these factors.
But what is an ESG investment?
ESG stands for Environmental, Social and Governance.
Socially responsible investment dates back to the 1960s, when investors began to avoid companies with negative reputational factors (e.g. companies involved in the South African apartheid regime). Much has been done since then, and in 2015 the United Nations officially set 17 Universal Goals for Sustainable Development.
Investors are increasingly applying these non-financial factors as part of their investment analysis and selection process and, while ESG metrics are not mandatory in reporting, More and more companies publish specific data on ESG factors.
ESG investments towards SRI
The ESG investment was born from the Socially Responsible Investing (SRI) philosophy while there are fundamental differences.
SRIs typically use negative value judgements and screening to decide which companies to invest in while ESG investment seeks to find positive value in companies that apply socially responsible principles.
The SRI filters and excludes from the portfolio holders companies that do not meet certain criteria while the ESG opts for realities defined "impact" based on the three related areas:
• Environmental factors (Environment), refer to the company’s behavior on issues related to resource depletion, climate change, waste and pollution.
• Social factors (Social), are related to the company’s treatment with respect to people, workers and local communities, including health and safety issues.
• Governance (Governance) factors, refer to corporate governance and policies, including tax strategy, corruption, structure, pay.
Why integrate the ESG factor into your business model
It is clear that social responsibility is a topical issue at any level (financial, regulatory, etc.) and, regardless of the legal requirements, it is an issue that should be addressed within your organization.
Because many investors are incorporating ESG factors into the investment process, integrating sustainability elements into your strategy can definitely impact your revenue.
This requires a change of mentality: ESG must be considered an investment rather than a cost because it allows to obtain various benefits, between which a greater trust in the market and a better reputation.
But does the ESG factor generate an excess return for investors?
You can’t become an ESG champion overnight
It takes time to enhance its culture and create a dedicated team to invest in long-term initiatives to drive shared value creation.
ESG organizations try to avoid short-term and low-cost thinking.
Instead, they imagine the cause and effect of corporate actions and capture stakeholder-focused value creation opportunities while avoiding stakeholder-related risks. Shareholders continue to thrive even if not at the expense of employees, customers, suppliers, the community or the planet - and usually over a longer time horizon.
Therefore, even the studies that analyze the ESG factors in the analysis of a possible over or under performance are difficult to grasp all the aspects of this new company philosophy and certainly in many cases the added value of an ESG culture is not yet reflected in the share value.
To date, not all scientific analyses and publications support the idea that ESG factors always lead to better equity returns. There are many variables at play, including simple elements such as time and the fact that not all stock exchange operators are good stock exchange operators.
However, a significant amount of research suggests a positive correlation between companies that do well and companies that do well financially - and by extension, are good for shareholders.
At the same time, there is not a single study that proves otherwise.
So, if ESG factors are likely to be positive and, at the very least, not detrimental to business performance, then why shouldn’t investors want to invest in companies looking to make the world a better place?
Oliver Camponovo works as an analyst in the financial world and offers advice in both corporate controlling and risk management. He strongly appreciates block chain impact investment & blockchain.