Photo: What ESG funds could do for the planet (and for your company). Credit: Unsplash
On the one hand, socially responsible investments take into account the same financial criteria associated with traditional investments, such as the relationship between profitability and risk, but they also consider extra-financial aspects. The market has started to capitalize on companies that take into account ESG criteria (environmental, social and governance):
- Environmental: These relate the company's activity to environmental conservation. They pay attention to renewable energies, the climate crisis or energy efficiency. In addition, on June 1st the National Securities Market Commission (CNMV) ruled that funds can only bear the ESG label if they allocate more than 50% to sustainability.
- Social: These relate the company directly to society and, above all, to those with whom it has a direct relationship, such as suppliers, employees or local communities impacted by its activities. These include aspects such as education, health, human rights and gender equality.
- Good governance: these are concerned with transparency, internal policies, accountability, management and company leadership.
According to Spainsif's Understanding Socially Responsible Investments Manual, it provides a tool for promoting a committed policy in those entities in which it invests, and is applicable to any type of financial product, from investment funds, through to pensions and life insurance, to venture capital funds. “Every day society demands more and more non-financial considerations for companies to leave a positive footprint on their environment,” explains Elena Rodríguez, director of Open Innovation & Market Intelligence. In addition, integrating ESG factors is one of the ways in which socially responsible investment has grown the most in recent years, increasing by 69% between 2016 and 2018, according to the latest Global Sustainable Investment Review report.
There are several arguments for implementing ESG criteria in your company:
- The Earth needs it. Since 1990, global carbon dioxide (CO2) emissions have increased by almost 50%, according to UN data, and the consequences for our planet are about to reach irreversible levels. Businesses, along with governments and civil society, have a key role to play in driving systemic change that can prevent the consequences of this climate crisis. According to the UN, in order to be part of the solution, corporations must improve their energy efficiency, reduce their carbon footprint and set emission reduction targets. HSBC's Responsible Investment Review report asserts that ESG criteria can help align a company with the Sustainable Development Goals and the Paris Agreement, establishing a long-term transformational framework, which can have a “material effect” on the financial performance of the assets in which we invest.
- It increases profitability and helps manage risk. The company will be more attractive to investors, shareholders, customers and even its own staff. “Not only does it achieve greater cost optimization, but it can also have an impact on the company's purpose and on employees' commitment to its mission and long-term goals, as they will be more motivated to work in a place they consider ethically positive,” Rodriguez explains. As a result, companies that integrate them tend to attract and retain the best talent. A Robeco study confirms that companies that align themselves with SDGs have a lower credit risk. During the pandemic, ESG funds have been more resilient than traditional funds and have shown to be less volatile.
- Regulatory change. “Not only are consumers becoming more demanding, national and supranational regulators are also tightening their demands,” says Rodriguez. UNPRI, an international network of UN-backed Principles for Sustainable Investment, reports that since the mid-1990s, sustainable investment regulation has increased significantly. This is due to regulators' recognition that the financial sector can play a key role in addressing various global challenges or combating tax avoidance. Those sectors that do not contribute to achieving the 2030 Agenda risk facing sanctions, withdrawal of licenses or damage to their reputation. Moreover, including these criteria is already part of investors' fiduciary duty.
Nevertheless, in order to avoid your company being accused of greenwashing, once you have determined the criteria for your ESG framework, you must establish metrics, measure them on a regular basis and share progress publicly in sustainability reports. Businesses have moved away from their traditional approach: they no longer simply generate wealth, but are aware that they must provide social value by caring for the planet and improving people's lives.