Just as the climate change crisis – with powerful storms, unprecedented droughts and wildfires – is compellingly becoming a clear and present danger, more and more consumers are making environmentally-sensitive purchases. Asset managers are also increasingly incorporating environmental, social, and governance (ESG) metrics into their investment decisions.
Last September, 12 of the world’s largest investors – including Allianz SE, Swiss Re AG, and Zurich Insurance Group – committed to making their investment portfolios carbon-neutral as part of the Net-Zero Asset Owner Alliance convened by the UN.
The result: $2tn of assets were deployed using ESG analysis.
ESG investing accounts for concerns from gender equality to worker rights to new ways to provide funding to charities working in poor countries. What was once a fringe approach has now seen big investors, with KKR, Vanguard Asset Management and Columbia Threadneedle Investments, creating funds focused on social concerns.
The common notion that underpins social investing is that capitalism has obligations that go beyond shareholders and return on equity and that investors and companies also need to consider their impact on customers, employees, local communities and society in general. Businesses need to factor in these overlapping constituencies to operate, and a threat to this ‘licence’ can have an impact on their bottom line.
Organised efforts at responsible investing can be traced back decades. These approaches, which focused on screening out companies seen as doing specific kinds of harm, later came under the term socially responsible investing, or SRI. Over time more companies adopted corporate social responsibility (CSR) policies amid increasing scrutiny of their business practices. Some investors also advocated what became known as impact investing as they sought to make a positive effect on the world, rather than just avoid the bad stuff.
The biggest change under ESG is that SRI, CSR and impact investing are now coming under a single umbrella just as ESG has been embraced by policymakers, regulators and an ever-bigger number of investors.
A recent Deutsche Bank report suggested “the S in ESG will increasingly be the ‘next big thing’ when it comes to investor focus.” The claim is that long-term returns will be higher from investing in companies that pay attention to the social part of their business.
A recent analysis by Moody’s Investors Service suggested social considerations posed “high credit risk” to $8tn of debt that it assesses. Moody’s said emerging-market governments, healthcare providers, heavy industries and consumer sectors had the highest risks related to the social.
A new generation of global inequalities fuelled by climate change and technology could trigger violence and political instability if left unchecked, the UN warned on Monday.
More than 1,500 investment managers have signed up to the UN Principles for Responsible Investment and the ESG sector is now the fastest-growing part of the market.
Given the greater awareness of ESG and the way information travels across social media, companies are learning that the rise of “S” in ESG means that bad behaviour can be increasingly expensive.
They need to show now, clearer than ever, they are part of the solution and not the problem.
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