Organizations are always looking for methods and systems to introduce the best possible decision making. A strategy currently gaining traction comes in three simple letters; ESG. ESG or Environmental, Social and Governance describes assessing investment opportunities based on their sustainability or the ethos behind the same.
There are a number of factors businesses must consider before their investments can be deemed ESG compliant. In order to make the deduction process simpler, a growing number of organizations have looked to ESG consulting or ESG advisory services provided by an external firm.
In 2018, businesses held USD $11.6 trillion in assets up from USD $8.1 trillion (Investopedia) two years prior. The deep dive into ESG friendly investments has been on the rise, with results undeniable. Keeping track of the latest trends in ESG investments will definitely help businesses understand where revenue generation could strike next.
What is ESG?
ESG is a general term used to describe Environmental, Social and Governance playing the deciding factor in terms of sustainable, responsible and ethical investment decisions. ESG indicators are best for organizations looking at bigger picture investments as the factors are non-financial. Additionally, ESG indicators can be a strong asset in terms of risk assessment along with investment deduction.
When assessing criteria surrounding the environment, it is critical to understand how business activities affect adjacent areas physically. This could cover energy consumption, waste, pollution, effects on natural resources and conservation as well as the treatment of animals.
Businesses are able to identify these factors and deduce if activities pose a concern to the environment or are currently creating adverse side effects that must be addressed moving forward. Addressing concerns around toxic emissions or management of hazardous waste also helps avoid compliance issues at a later date.
Social criteria help organizations understand how relationships are built and managed. All stakeholders, including suppliers, employees, charitable organizations in the vicinity and others, must all be taken into consideration before executing a decision.
Assessing social criteria include asking questions like “are employees adequately protected within their work environments?” and “how far do corporate social responsibility plans genuinely affect the community?” clarify how organizations are able to positively affect all the individuals they interact with.
Staying compliant with rules and regulations saves time, effort and heavy funds that may go towards bailing a business out at a later date. Taking government policy into account lets investors know the business is transparent and accurate with their activities.
Additionally, conflicts of interest are less likely to crop up when considering the government. If investors are looking for non-problematic board members and organizations that do not capitalize on political contributions for preferential treatment, they are more likely to invest.
Top 10 ESG Trends for The Decade
The ESG developments over the past decade have paved the way for more sophisticated and helpful ESG assessments pertinent to today’s environment. Understanding the key trends likely to feature across the upcoming decade help businesses piece together their action plan and how to approach investors/regulators as the ESG landscape continues to shape up.
1. Climate Change
More governments are pulling focus towards climate-related regulations. More companies are encouraged to reduce emissions and participate actively in a low-carbon economy. As a result, more organizations need to reassess their current activity backlash and position themselves in favour of minimizing the impact on climate change.
2. Good Governance
Expanding on traditional business governance models, the focus now includes improving the quality of the board, shareholder rights and incentive structures for management. Prioritizing environmental and social issues is likely to emerge as the new standards by which businesses operate. CSR responsibilities are likely to play more prominent roles while ensuring value addition in the long run.
3. ESG Transparency
Using ESG factors to determine the next worthy investment is going to be an open and widespread conversation. With more businesses reforming on the basis of these factors, pressure mounts on those businesses not paying attention. Introducing early regulation compliance helps the business stay positively contributing not just to themselves but to surrounding areas and stakeholders. Non-ESG compliant organizations are likely to be left behind.
4. ESG Investing
Asset management is likely to see a transition from ESG stewardship to integration. ESG disclosures are likely to offer stronger methods to deduce the right ESG risk assessments into their decision making. More investors are likely to assess organizations based on their ESG compliance and related risks. Moving forward, companies factoring in ESG regulations stand a better chance of securing investment.
5. ESG Engagement
A strong likelihood of ESG-related shareholder activism is likely to rise over the 2020s. Convention has dictated asset managers to be the main driving force of change within an organization. As shareholder resolutions have facilitated reforming mechanisms and help with governance concerns, it is only fitting shareholders move to incorporate stronger diversity and proactive stances.
6. Economic Activism
Businesses are shifting from simple profit-based motivations to allow their companies to depict strong goals and ideas. With activists pushing for the replacement of board members, improved internal governance aggressively pushes away from financial factors being the sole indication of a business succeeding.
7. Data and Technology
Data and technology are soon to play prominent roles with detecting the best ESG compliant investments. Value creation will be easier to deduce, and stronger visibility on challenging metrics is bound to be offered. As a result, improved and more standardized disclosures will offer investors the ability to understand the impact of ESG factors on valuations.
8. Diversity and Inclusion
Diversity protocols are likely to extend beyond the boardroom to overall operations and stakeholders and have already gained momentum. Within the United States, for example, boards across all organizations are likely to cross the 30% (Harvard Law) threshold of female participation before 2025.
9. Executive Compensation
Larger scale investors are likely to reassess the compensation provided using better assessment methodologies and evaluation benchmarks. This in turn, will encourage transparency and appropriateness of metrics evaluating performance and ability to reach targets. As ESG becomes a more widely adapted investment assessment tool, ESG metrics are used to deduce the same.
10. Political Impact
Politics are bound to play a stronger role in decision making as the decade moves forward. Countries and states encouraging adverse effects through lack of regulations or conducting activities that are not ESG compliant are less likely to be involved in new business ventures. As public pressure mounts against the negative activities, businesses tied to the same are bound to face scrutiny.
Introducing ESG policies as the concept gains traction can only help businesses stay out of trouble and in better lights with stakeholders, the government and society. As ideas evolve, staying ahead of the curve offers organizations an opportunity to not only better overall prospects but contribute positively towards public image and long term returns.
Keeping an eye on ESG trends for the decade allows businesses to incorporate new and better practices as needed.