Environmental, Social and Governance (ESG)
Financing and Investing
The Financial Times defines ESG as a “term used in capital markets and a tool investors use to evaluate corporate behavior and determine the future of financial performance of companies.” It adds that “ESG is a subset of non-financial performance indicators which include sustainable, ethical, and corporate governance issues such as managing a company’s carbon footprint and ensuring that there are systems in place to ensure accountability.” The effects of climate change are accelerating with governments globally implementing measures and policies to combat and mitigate the impacts. ESG has become a leading form of sustainable finance and fits within the connective tissues that initiates the drive to accomplish the objectives set out by the Paris Agreement. Recently, there has been a spike in investors’ use of ESG approaches, including the incorporation of climate transition factors into investment decisions. In 2021, there was a significant increase in ESG investing despite the effects of the COVID-19 pandemic; currently Bloomberg reports that ESG investments total USD40 trillion.
A breakdown of ESG as it relates to the different components is as follows:
Several companies such as Morningstar, MSCI, Bloomberg, and S&P calculate an ESG score and provide a rating which is then used by investors. According to MSCI, ESG ratings are designed to help investors understand the ECG risk and opportunities and integrate these factors into their portfolio construction and management process. Within the model the company uses thousands of data points across thirty-five (35) ESG key issues focusing on the intersection between the company’s core business and the industry issues that can create significant risk and /or opportunities for a company. Companies are rated AAA to CCC scale relative to the standards and performance of their industry peers.
These ratings are very important as a company’s performance, based on the ESG criteria encompasses issues such as diversity, carbon emission, inclusion and climate change. These issues are currently at the forefront of companies as their importance in decision making have skyrocketed in the past few years. Hence, investors pay specific attention to how companies score based on the ESG criteria before investing. On a company level, an adequate ESG rating will benefit in medium and long term as they may be more resilient and sustainable, and less of an investment risk.
ESG IN TRINIDAD
Within the scope of Trinidad and Tobago’s vision 2030, the government places specific emphasis on strengthening the environmental governance and management systems. In keeping with the United Nations (UN) 2030 agenda for sustainable development goal, strategic initiatives are being utilized to effectively transform both the private and public sector. Part of these changes would see a comprehensive review of environmental policy and legislation designed to ensure that they meet the requirements of best international practices and policies.
There would also be active efforts to reduce the carbon footprint. According to Vision 2030, it is acknowledged that there is a high level of carbon emission from industrial sectors. To combat such issues, the government has proposed the use of alternative fuels, energy efficiency and renewable energy technology. In enhancing energy efficiency and increasing the production of renewable energy in power generation, opportunities can be created for the establishment of new industries and sustainable employment.
It should be noted that investing into ESG processes comes with associated pros and cons. Forbes Advisor lists some consideration when investing in ESG. These include:
- It isn’t a one-size-fit-all
When investing into the ESG fund, companies should bear in mind that the funds are portfolios of equities and/or bonds for which environmental, social and governance factors have been integrated into the investment process. This means that equities and bonds contained in the fund have passed stringent tests over how sustainable the company or government is regarding the ESG criteria. Keeping this in mind that the definition of socially responsible is highly subjective and constantly evolving therefore, companies would have to ensure that their policies and procedures core values correlates with the that of the ESG fund.
- Lower profit margin
There is an added cost associated with ESG investing. With ESG investing you are ethically investing taking into consideration the short to long term socio-economic effects of several factors. Hence, would receive a lower profit margin than a firm that focuses solely on profit maximization.
The Caribbean is one of the most heavily dependent regions on the tourism industry, much of which is driven by the blue economy. This has seen regional leaders actively push climate focused policies given their vulnerability. ESG related investments for the region are hindered by the corruption level that exits. Without conscious anti-corruption efforts, the Caribbean region may not be able to attract an adequate level of ESG investment.
- Ease of Doing Business
Aggressive transformational reforms are needed within the Caribbean region to facilitate the ease of doing business. Preposterous red tape involving time-period, cost and procedures hinder the smooth, efficient investing processes within the relevant ministries.
The Caribbean needs to invest heavily in technology in order to facilitate the up rise of ESG investing. Digitalization of the relevant Ministries will aid in the ease of investing. The onslaught of the pandemic showed the dire need to ensure systems are not interrupted.
ADVANTAGES OF ESG INVESTING
- ESG investing practices can grant organizations a competitive advantage over that of their competitors. It strengthens the company’s brand as strong ESG practices adheres to the adaptation of modern socioeconomic standards. Modern consumers build brand loyalty to companies who possess profound socioeconomic consciousness, diversity in the workforce and provide proper working conditions.
- It allows companies to take a proactive approach to issues which have saturated industries such as oil gas. The oil and gas industry has been one of the top carbon emitters throughout history with ESG investing these oil producing companies can seek a government- industry collaboration to reduce emission across the supply chain from the point of production to consumption. This proactive approach will aid in the reduction of negative press the companies receive as well as a reduction in action from activists.
- Companies that adhere to one of socio-economic consciousness usually attract top-tier employees. Millennials usually support companies that share the same standards and values as them whereby social and environmental responsibility is one of their values they hold in high regard. Hence, once employees are happy and enthusiastic about their work environment there is a boost in the workforce overall productivity.
To conclude, ESG investing is term that is becoming increasing important in the 21st century as it aligns itself with the morals and values of the working, investing and purchasing population. It possesses benefits as well as risk factors however, it grants organizations the ability to build a more sustainable future. ESG not only has an impact on business culture but society at large and will continue to impact how business is gone long into the foreseeable future.
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