When did ethical and sustainable investment strategy be a serious consideration for shareholders, investors and asset managers?
Global investment focus of shareholders, investors, and investment managers is shifting. We are currently seeing the transfer of wealth to millennials, environmental disasters, costs and risks increasing, and improved performance of operations through sustainable practices.
The need for environmental, social and governance (ESG) factors, in investment selection, as Boston Consulting Group indicate in their recent article;Investors Care More About Sustainability Than Many Executives Believe, that 75% of senior executives in investment firms see ESG factors as materially essential to their investment decision. The disconnect can be seen that only 60% of companies use a sustainability strategy, and merely 25% allow us a clear business case for sustainability.
ESG boasts a wide variety of impacts about the risk and return values connected with an investment. These issues might be surrounding regulation changes, business ethics, or direct impacts on financial, operational, strategic or reputational risks. Examples of such risks are:
Environmental: natural resources, waste, climatic change, pollution, and clean technology.
Social: safety, group, human rights, and hour or so.
Governance: compliance, regulation, reporting, conflict interesting in employee, shareholder or board levels.
The transition from purely fundamental investment approaches, to contemplate the medium to long-term impacts in our business decisions in environment, social and governance will modify the market from up-and-coming small to medium business, suppliers, manufacturers, supply chain, agribusiness, healthcare, large corporates, and listed business right up to multinationals. Investment and flows of capital are what drive our economy plus the complex ecosystem with the global economy understands value of sustainable ESG strategy in where they need to invest their funds.
The Australian market has typically struggled when going to terms with the way to evaluate environmental, social and governance business policy, and quite often does not think it over cost effective. Reporting on ESG in Australia getting the club recently, wasn’t an important process for listed business, and investment into internal ESG risk reduction strategy minimal.
The variety of environmental impacts on businesses in addition to their operations will vary significantly plus some organisations are better placed for taking advantage of these greater than others. To quantify environmental risk is usually a challenging process to include terms of monetary value, however, the transition to your low carbon economy is usually a key allure. To achieve a small carbon economy requires investment into improving operational efficiencies within energy, waste and water usage by utilising clean technologies.
Social impacts and risks require analysis in a business’s immaterial characteristics and never found on an equilibrium sheet, including culture, employee productivity, relationships with customers, safe practices, community engagement and sustainable supply chains. Social business decisions often surround ethics in conjunction with profits. Although not normally a direct influence on business performance, social and ethics are a vital process of modern business practices.
External analysis on business governance processes may present its challenges. Corporate behaviour, selection and policy require listed business to report extensively usually covered by large volumes of internet data. One clear instance of governance risk was Volkswagen’s diesel emissions scandal in 2015. In EY’s report, Tomorrow’s investment rules: How global institutional investors are applying ESG to tell decision-making in 2015, (2015) mentioned that ‘nearly 60 % of those surveyed assume that companies will not adequately disclose ESG risks.'
Harvard Sustainability Review, (2012), did a primary comparison between High Sustainability organisations to Low Sustainability organisations of similar size, operations and sectors. ‘In particular, we track corporate performance for 18 a few years find that High Sustainability firms outperform Low Sustainability firms at stock market along with accounting performance.'
The possibility to improve ESG performance reaches a crux for both listed and personal business. Investments into sustainable practices improve long-term bottom-line performance, mitigate risk now represent a vital part of business. Although driven by investors, companies should realise the significance about comprehensive ESG reporting, creating sustainable strategy and building ethical business culture. The modern, educated, ethical investor and consumer is here now, and in addition they see value in sustainability.
 Unruh, Kiron, Kruschwitz, Reeves, Rubel, Meyer Zum Felde, G.U., D.K., N.K., M.R., H.R., A.F., 2016.Investors Care More About Sustainability Than Many Executives Believe. 1st ed. Global: Boston Consulting Group.