ESG niches: What makes a green portfolio?
More and more businesses are investing sustainably; corporations integrate are integrating ESG (Environmental, Social and Governance) factors in their investment decisions. Itself an evolution from SRI (socially responsible investing), ESG keeps on expanding, and it seems there’s no stopping it, as the governments, the public and other regulatory bodies call for sustainable investment practices. Experts bet: ESG is here for the long run, and it’s just going to keep growing. What are the ESG niches that took the financial industry by storm?
The biggest ESG niches so far
Giant companies in the steel and oil industries have been at the receiving end of the blame for extensive environmental damage due to their operations. Studies on climate change, environmental issues and their negative impacts on the planet and quality of life have continued to power the global appetite for sustainable investments.
There’s an undeniable clamour from environmental activists and the general public alike for corporations—big and small—to engineer innovations that would integrate social and environmental impacts into their financial decisions and objectives. What’s more, a chunk of the public has adjusted its consumption habits based on environmental and ethical concerns. And corporations have taken note of these factors.
The Paris Agreement is also a major driving factor for investors to open their wallets to environment-friendly corporation practices. Many companies have aligned their goals with the Agreement’s objective of limiting global warming to 2°C.
DIVERSITY AND INCLUSION
It’s not just about biodiversity anymore. Because there is a deeper understanding of office diversity and inclusion, companies have started emphasising their advocacies on diversifying their culture and not just their portfolios.
In Canada, for example, the Canada Business Corporations Act required corporations to comply with diversity disclosure ‘beyond gender’ for federally incorporated public companies. This policy came into force in January 2020, the first such regulation in the world. Moreover, in a 2020 survey, 73 per cent of Canadian company respondents said they want a part of their portfolio to invest in organisations that provide opportunities for diverse and women groups. In the UK, the 30% Club Investor Group has been pushing for more diverse board members and senior managers.
‘Embedding diversity in the everyday culture and strategy of the organisation, with the board and senior management setting the tone. This is required to engage employees, create understanding about where the barriers are and to build alternatives that support inclusion. Diverse recruitment and promotion, data monitoring and transparent reporting are also key’, said Patrick Odier, senior managing partner at the Geneva-based Swiss bank Lombard Odier Group.
In 2021, BSR published: ‘In the business context, [human rights] is manifested in a responsibility to adopt a human rights policy, embed respect for human rights throughout the business, and undertake human rights due diligence—in other words, a fundamental methodology and mindset, not simply an issue to address’.
There are risks to businesses that do not give regard to human rights. First of these are lawsuits; fines, suspension, divestment and reputational damage, according to the Institute of Human Rights and Businesses. In a report, the institute also mentioned how embedding respect for human rights in the managerial process prevents human rights abuses within their ranks and the company.
In 2018, eight of the world’s biggest multinational brands released a pooled statement announcing their full support for human rights defenders and civic freedom. These brands said they were working on ‘finding effective ways’ to help human rights defenders ‘under threat’.
ESG niches making green trillions, trillion greens
Global ESG investments are projected to be worth up to $53 trillion by 2025 — that’s three years from now — based on a 2021 Bloomberg Intelligence analysis. What would this mean for the financial market?
According to an OECD report: ‘To meet growing demand for this form of sustainable finance, ESG rating providers and investment funds are working to integrate metrics aligned with environmental resilience, climate risk mitigation, and strategies toward renewable energy among others’. The report furthered that investors are committing to applying financial strategies to minimise their operations’ negative environmental impact and help facilitate strong climate-resistant economies.
The European Union is fast-tracking a common language and region-wide architecture for ESG investments. For example, in March 2021, the EU Commission has enacted the Sustainable Finance Disclosure Regulation, which seeks transparency in the way European companies integrate ESG into their businesses.
‘The EU taxonomy provides uniform reporting requirements and criteria on the basis of which an economic activity is considered sustainable. The SFDR raises the bar for funds claiming to be green’, according to a Bolder Group insight. Read more of her discussion here.
A 2015 meta-analysis by the Global Research Institute examined studies that looked into the results of ESG factor integration in businesses. Over 62 per cent of these studies showed a positive correlation between ESG investing and favourable financial flows.
Bolder is looking into it …
ESG has evolved far beyond being a business accessory or add-on. Gradually, it has morphed into a mandatory practice for investors all over the world. This is, in part, due to the Covid-19 pandemic, social unrest and call for social equity as well as media coverage of climate injustice and environmental problems. Professional asset managers are well-aware of the increasing demand for ESG compliance, which, of course, comes with a cost, financial- and time-wise.
As a global financial services provider, Bolder guides and assists its clients in their international business and investment activities, so they can effectively break the barriers in this present complex global marketplace.
Let’s discuss ESG investing. Reach out to the nearest Bolder office.
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