Doing Good for Good Profit
Responsible investment is an approach to investing that incorporates environmental, social and governance (ESG) factors into investment decisions. These three central factors are used in measuring the sustainability and ethical impact of an investment in a company or business. ESG aims to better manage risk and generate sustainable, long-term returns. Ultimately, ESG incorporates ‘value’ and ‘values-based’ investing.
ESG factors cover a wide variety of issues that were previously not part of the conventional financial analysis. Depending on the industry, this includes how companies respond to climate change, how good they are with managing environmental resources like paper and water, how effective their health and safety policies are, how they treat their workers and whether they have a corporate culture that builds client trust and encourages forward innovation.
Where Did It All Start?
The story of ESG investing began in January 2004 when Kofi Annan (who was the Secretary General of UN at the time) wrote to over 50 CEOs of major financial institutions and invited them to participate in a joint initiative. The goal of the initiative was to find ways to integrate ESG factors into capital markets.
A year later (2005) this initiative produced a report entitled “Who Cares Wins,” with Ivo Knoepfel as the author. This was when the term ESG was first coined. The report made the case that embedding environmental, social and governance factors in capital markets make good business sense and leads to more sustainable markets and better outcomes for both the environment and societies as a whole.
The term ESG was first coined in 2005 in a landmark study entitled “Who Cares Wins.”
At the same time, the United Nations Environment Programme – Finance Initiative (UNEP/Fi) – produced the “Freshfield Report” in which they demonstrated that ESG measurements are relevant for financial valuation.
These two reports formed the backbone for the launch of the Principles for Responsible Investment (PRI) at the New York Stock Exchange in 2006.
Enter The PRI, Backed by the UN
The PRI is the world’s leading proponent of responsible investment. It is not associated with any government; it is supported by, but not part of, the United Nations (UN). Therefore, PRI is truly independent. PRI is currently supported by the United Nations Environment Programme (UNEP) Finance Initiative and UN Global Compact.
The PRI acts in the long-term interests of its signatories, of the financial markets and economies in which they operate and ultimately of the environment and society as a whole.
What are the Benefits of ESG?
Over the past two decades, more research papers were published showing that good corporate sustainability performance is associated with good financial results. It is clear to investors that sustainability has real business benefits when continuously integrated into business operations.
Six major advantages of practicing sustainability are:
- Improved brand image and competitive advantage. Studies have shown that consumers are more likely to purchase from companies with environmentally sustainable practices
- Increased productivity and reduced costs. Development of sustainable business practices leads to an efficient operation that conserves resources, which enhances employee productivity and reduces cost
- Increased business ability to comply with regulations. Integrating sustainability positions companies to meet changing regulations in a timely manner. This is particularly useful in today’s highly regulated markets
- Attraction of employees and investors. Most people prefer to be associated with the positive. They do not want to be linked to companies implicated in ecological disasters and social welfare or corruption scandals
- Reduced waste. This is likely the simplest and most obvious way to engage in sustainable practices
- Increased shareholders satisfaction. Sustainable business practices can be used to lower costs, which simply results in increasing profit
The Remarkable Rise of ESG
In 2018, thousands of professionals from around the world hold the job title “ESG Analyst” and ESG investing is the subject of news articles in the financial pages of the world’s leading newspapers. Many investors recognise that ESG information about corporations is vital to understanding the corporate purpose, strategy and management quality of companies. Needless to say, ESG is now a big deal.
To put things in perspective: the growth of ESG assets in the US is up over 200% from the past decade!
And why wouldn’t it? Over the past decade, ESG and socially responsible investing (SRI) has done a great deal to weed out unsustainable companies with outdated practices and harmful side effects. Investors demand ethical strategies that prioritise environmental, social and governance (ESG) factors, while balancing the growth of potential returns.
Xeraya & ESG
Since 23rd March 2018, Xeraya Capital has had an official commitment to the development of a more stable, sustainable and responsible global financial system. We are one of 6 signatories in Malaysia, joining a worldwide network of more than 2,350 fellow investors, all of whom have pledged to put the Principles for Responsible Investment (PRI) into practice.
