While ESG is becoming more mainstream, there’s still a long way to go before we see a large emergence of purpose-driven companies. We have ushered in a new start, but it will not drive the transformation over the long-term quickly. For that to happen, we need more innovation. As I discussed in my last article the world needs a more diverse set of sustainable investment offerings to help foster the development of new technologies, ground-breaking ideas and products that address at least some of the 17 United Nations SDGs that sustainable investors are seeking.
One such innovation is transition financing, which will provide funding to energy, transportation and other industrial companies that want to reduce their environmental footprint and demonstrate their commitment to move to a low carbon economy in the face of climate change. It can also help fill a gap in green financing, where certain investments may not meet a green standard, but can still help reduce emissions and mitigate climate change in the near-term.
Companies adopting ESG to drive their sustainability commitments will only grow from here. Meanwhile, investors examining a company’s commitments to sustainability through ESG analysis is a growing market trend.
Investors are also seeing the benefits of ESG investing. In one meta study, 88% of reviewed sources, companies with robust sustainability practices demonstrated better operational performance while 80% of the reviewed studies exhibit that prudent sustainability practices have a positive influence on investment performance.8 Sixty five percent of hedge fund managers are now planning to have ESG policy in place by end of 2019, according to Preqin.9 Meanwhile, short-selling laggards in the sustainable investment universe or those exposed to climate risk has emerged as a new trend in the asset management landscape.
Due to the voluntary nature of reporting annually and the lack of standardization, much of the ESG data and disclosures of companies are incomplete today, and often lack insights that investors can directly use. One factor that would accelerate ESG adoption is artificial intelligence. As data collection becomes more advanced and as AI’s analytical capabilities become even more sophisticated, we can imagine a day when, along with the stock or bond prices, quantifiable ESG metrics and other insights will roll across our TV screens on a real-time basis. It will not only be easier for companies to report their own sustainability data monthly, but third-party research firms and sell and buy-side analysts will do more comprehensive analysis themselves.
A company’s purpose, material ESG factors, financial and ESG performance, together with its impact metrics, will be shared as a normal way of doing business. Performance attribution will no longer be limited to financial return; monthly statements from retail to institutional investors could include ESG performance attribution. As well, we’ll hopefully see more companies measure their social and environmental impact in real time, with their ESG profile clearly linked to their purpose. The businesses that do this will be the new winners. It demonstrates transparency and will help their business by giving them access to lower cost of capital or easier access for funding their capex linked to sustainability. Their ability to move forward and transform with a triple bottom line approach will allow them to stay competitive against their peers.
As the sustainable finance industry develops, definitions around ESG and implementation of ESG-induced business practices and metrics will evolve. If an energy company issues transition bonds, then their ESG impact will need to be re-examined. If oil and gas producers can create a net zero model, funds that exclude these companies will have to rethink labelling them as incompatible with a low-carbon future.
New innovations could make us rethink the way we invest or fund businesses. New entrepreneurs will make us re-imagine what’s possible. More people will see just how all-encompassing ESG can be.
Purpose, as many people are finding out, is becoming paramount. The rise of new corporate forms such as a Benefit LLC, Low Profit Liability Company, Public Benefit Corp and Sustainable Benefit Corp allow different ways for a business to demonstrate its purpose, which means we’ll only see more ESG-driven companies in the future. As Virgin’s Richard Branson says: “If the people who work for a business are proud of the business they work for, they’ll work that much harder, and therefore, I think turning your business into a real force for good is good business sense as well.”