The sustainability leitmotif resonates with many other corporations, from Coca-Cola Co (NYSE:KO) promoting sustainable packaging – despite winning the worst plastic polluter by environmental group Break Free from Plastic – to BP PLC (LON:BP) publicising its renewable business, although 96% of its capital expenditure goes into oil and gas.
It is a hot topic in the market, with companies under pressure to get their ESG in order. The acronym stands for environmental, social and governance and refers to the three central factors in measuring the sustainability and societal impact of an investment.
The regulations do not account for ethical investing, but provide a framework for risk analysis to help determine the future financial performance of a company.
For instance, businesses have been hit by a strain in resources like water, food, and energy in those areas most affected by climate change.
“Investors recognise that companies employing sound ESG practices are better positioned to deal with future challenges in a rapidly changing global landscape,” according to Michael Lok, chief investment officer at Union Bancaire Privée (UBP).
“An individual company proactively engaging with issues such as climate change, pollution and emissions, workplace safety and labour standards, and board independence, increases not only its regulatory compliance and contribution to society but, just as importantly for investors, its ability to create long-term economic value by comparison with its peers,” he added.
The next couple of years will see a pipeline of new policies, with the UK releasing its 12-principle Stewardship Code as soon as January.
Over next year, the EU will release its Sustainable Finance Disclosures – required for institutional investors – and Climate Benchmarks and Benchmarks’ ESG Disclosures, directed at indices used as benchmarks.
According to Goldman Sachs, the new regulations will boost ESG integration, with US$45 trillion of assets under management seeing a shift by mid-2020.
Companies will be put on the spot, in particular within sectors like mining, energy, plastics and textiles.
“Asset managers speaking at conferences such as Mines and Money London 2019 and Minex Eurasia said that it has been more difficult for mining companies to raise capital… and they linked it to this trend in ESG,” Jane Joughin, corporate consultant at SRK Consulting, told Proactive.
“They said that this trend in ESG has been shrinking the capital available to mining companies and the way the mining industry can access that capital again is by improving their ESG performance,” she added.
According to Goldman Sachs, some companies will avoid the issue by spinning off or selling ‘exposed’ assets, which does not yield real improvement, while private companies may hold off from going public to avoid additional pressure.
Meanwhile, experts say listed companies have a lot to gain from proper ESG compliance.
“We believe that ESG and risk analysis is a source of alpha generation by doing it better or worse than others,” Bruce Jenkyn-Jones, co-head of listed equities and executive director at investment company Impax Asset Management PLC (LON:IPX), told Proactive.
“There is not going to be a differentiation whether you do it or do not do it, but the ability to incorporate it, some people will do it better than others and some people will outsource it to third parties.”
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