Responsible and sustainable investment results in better outputs and stronger financial returns for investors, communities, shareholders and the Mother Earth. Furthermore, this is a key pillar for an a sustained inclusive, and equitable economic growth. Environmental, social and governance investing is a strategy everyone should deploy to move towards a new value creation paradigm which makes the world a better place for everyone. Personally, ESG investing start with focusing on climate adaptation and mitigation and goes beyond a three-letter acronym to address how a company serves workers, communities, customers, shareholders and the global ecosystem.
Over the last twenty years, ESG has rapidly moved towards becoming a top priority for management, business boards and politicians, as it is perceived of key importance for long term competitive and inclusive success. According to McKinsey, over the last twenty years, ESG has expanded dramatically, and “sustainable investment now tops $30 trillion, up 68 percent since 2014 and tenfold since 2004”. Don’t get me wrong, there are still businesses, lobbyist and policy makers arguing against ESG, but I believe we are at a turning point, as there is strong evidence of better market performance of ESG focused businesses. Lets take a look at the recent stock market performance of ESG traded companies.
What is happening in the stock market?
Over the last 24 months ESG stocks have outperformed the market and have showed they can better withstand bear markets conditions. Furthermore, these companies are more resilient during high risk periods with high market volatility such as the recent Covid Pandemic. To be more specific, while almost all stock prices corrected during the initial phase of the pandemic in early 2020, ESG traded companies performed well above the market and were less volatile. In the month through mid-March 2020, almost 70% of ESG funds ranked in the top half of their categories and throughout 2021 they continued to show positive momentum particularly across the cleantech, and innovative financial technology that focus on people with limited access to banking, payment et, and credit. Among ESG companies that performed well over the market, the following are renowned names with strong ESG ratings and performance: Expeditors International (Transport and Logistics); Nvidia (Semicounductors); and Salesforce (Computer Sofwares).
Furthermore, the increased frequency and intensification of natural disasters, including floods, droughts, wild fire and extreme high temperature, is bringing renewed attention (particularly in the EU and in the US) to those companies that have “vulnerability reduction and sustainability approaches”. When asset and households are damaged, economics flows are interrupted and business continuity threatened, people start looking a risk mitigation options. This includes investing in resilience focused companies and teams (I define resilience as the ability of a company, a city or a system to absorb a shock, be it a natural or technological disaster, and bounce back rapidly and smartly). I personally believe that investment funds, hedge funds and family offices that embrace sustainability investment will significantly outperformed the market and continue to attract top talent. According to a recent Goldman Sachs research, over 60% of younger generation, is increasingly interested in investing and working in companies that take seriously ESG. In terms of valuation, companies that focus more aggressively to adhere to ESG factors, have higher valuation than those that do not.
Who Are ESG Investors and business leaders?
ESG investors are values-based investors who are more interested in what happens over the longer term period as opposed to the typical short term quarter to quarter approach; they are patient investors and they know well that great financial results and impacts require more than a few years. Additionally, investors incorporating ESG into their portafolio tend to be the activist kind, and work closely with management to ensure that they are helping building long-term value over a multi-year period. Thanks to a number of meetings and private interview with leading ESG entrepreneurs and investors, I came across a recurring concept they all seem to believe in: “don’t go after the last dollar of profit”, but make sure that these ESG companies are share value focused. This is an approach spearheaded by Professor Micheal Porter of Harvard, where companies are partnering with Government, and NGOs to maximize the full benefits of social and environmental advancement (https://hbr.org/2016/10/the-ecosystem-of-shared-value).
Another incentive for corporations investing in ESG, according to McKinsey, is operational cost reduction. In one of its recent studies (Getting your environmental, social, and governance proposition right links to higher value creation. Here’s why-McKinesy 2019), it explained that those corporations that use ESG metric effectively can lower operation expenses significantly. These reduction could impact profits by as much as 60%.
Based on the existing analyst, and market trend, it is clear that ESG is a strong corporate value driver and increasingly so given the environmental, social and governance pressure we are experiencing every day. Additionally, the perceived cost and risk of not acting on ESG is becoming harder to ignore.
I believe that in order to succeed in economic, societal, and environmental terms, we should not waste the emoting Covid Pandemic Crisis, and use it to promote innovation and continue building a culture of open, inclusive and economic resilient growth across sectors.
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