ellen boersma ESG specialist author
Ellen Boersma
ESG TRANSACTION & PROGRAMME MANAGEMENT SPECIALIST
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Responsible action and sustainable investment have been part of world leader agendas since 1987. The World Commission on Environment and Development (WCED) concluded in 1987 that our largest environmental problems are caused by poverty on one side of the world and non-sustainable consumption and production on the other.

Thirty years later, we have established that we consume 1.7 times of the earth’s annual production and that Earth Overshoot Day is earlier every year (Earth Overshoot Day is the date on which humanity’s resource consumption for the year exceeds Earth’s capacity to regenerate those resources that year). It was August 2 in 2017 and October 26 in 2008.

We also know that climate change is becoming a serious threat and that we will be sharing this earth with 9 billion other people by 2050. It is time to act.

Earth overshoot day graph energy ressources consumption

Source: Global Footprint Network National Footprint Accounts 2017

It’s extraordinary that, in our private lives, we now recycle plastics, eat less meat and would like our daughters to have meaningful careers. And yet, somehow these principles play a less important role in our investment decisions, quarterly results and risk policies.

Despite convincing evidence from high-quality universities like Harvard and Oxford, showing that the use of ESG principles by companies and investors substantially enhances performance, we still find it difficult to apply these lessons to our own businesses.

Evidence shows that 88% of prudent sustainability practices have a positive influence on investment performance: better disclosure of material ESG issues leads to higher share prices.
Ellen Boersma

Evidence is strong, but action is weak

Evidence shows that 88% of prudent sustainability practices have a positive influence on investment performance: better disclosure of material ESG issues leads to higher share prices. Research proves that ESG disclosure leads to annual stock returns that are 2.7%-7,5% higher than the returns of non-participating firms. The improvement in corporate financial performance is primarily due to the ability to reduce long-term risks and to create new opportunities such as new markets and new business developments.

With the exception of early movers, the financial industry has been late in responding. This might be caused by the lack of active stock ownership and short-term investment strategies. Or it might be due to the difficulties in collecting and analysing ESG data, which represents additional costs for companies and is not yet a priority for shareholders. With growing regulation in the financial sector, it may feel like just another reporting burden.


Risk, Performance & Reputation

So what needs to change to encourage companies and investors to be more proactive?

Regulation certainly appears a strong driver. The European Commission has a clear goal to remove barriers and to increase impact investment to EUR 180 billion. This draft legislation might encourage investors to redefine their governance policies.

The Commission is clearly prioritizing ESG issues and seems determined to make them a flagship policy. On 24 May 2018, the Commission issued a proposal for regulation on disclosure relating to sustainability risks. The proposal aims to integrate ESG considerations into the investment and advisory process, ensuring that UCITS funds, ManCos, AIFMs, insurance undertakings, IORPs, EuVECA managers, EuSEF managers and investments firms, integrate ESG into their internal processes and inform clients accordingly.

Another Directive - on long-term shareholder engagement - increases transparency obligations for institutional investors and asset managers by requiring the development and disclosure of an engagement strategy, including a description of how they monitor investee companies on non-financial performance. This Directive comes into force in June 2019.

Regulation takes place as a result of real-world events. In 2017, for example, insurance claims due to climate change reached a record high of EUR 110 billion. Google took a big risk by publishing carbon emission numbers in 2011, but it was the best risk-management mitigation action it could have taken.

Meanwhile, greenwashing or lack of transparency, can kill your reputation. Just look at Volkswagen. Or Shell, which cannot find enough technical staff willing to work in the polluting industry of fossil fuels. In fact, shareholder value of the large West European energy companies has diminished by E500 billion over the past 10 years.

Do you know how your investments perform on non-financial criteria? What are the ESG risks that your organisation is exposed to?


How to start thinking about ESG

So, where and how should you focus within the broad spectrum of ESG?

Focus on drivers which reflect your organisation’s economic, environmental and social impact and which strongly influence the assessments and decisions of stakeholders. Don’t forget your supply chain and subcontractors.

Choose the reporting tool that is proportional with the scale and impact of your company. Pick labels that are important for your customers and stakeholders.

In the end it is about common sense. The labels, reporting tools, UN goals etc. all have the same core values. If you’re just getting started on ESG issues, you could take a look at the UNPRI or follow the titles of the different GRI Standards.

 

Market value ESG factors key metrics non-financial drivers

Source: investorvalue.org

Begin today!

Starting today, just do 2 things:

1. Ask questions: ask yourself, stakeholders and the companies you invest in what steps they’ve taken and how they perform on the different non-financial parameters. By asking the question, you create awareness. Awareness leads to action.

2. Collect data. Gathering high-quality, useful data requires time (sometimes several years), resources, research and analysis. Incomplete or irrelevant data will not help you achieve your ESG aims. Look at what kind of data you have versus what kind of data you need.   


What to do if you have already started

If you are ready for the next step on reporting and labelling, companies can consider measuring their total economic and social impact, rather than merely reporting numbers. This gives insight into your competitive advantages, which could feed into your investment strategy.

Be transparent. Nobody expects you to be perfect. But people do expect you to have the right intentions, meaning you want your company to be both profitable and have a positive effect on society. You, as investors, have powerful voices in this value chain.

Do good business by doing your business good!
 

If you have any comments, questions or wish to share your experiences,
please contact me at ellen.boersma@fyn.lu

 

Glossary
 

ESG - Environmental, Social and Governance criteria
GRI - Global Reporting Initiative
UNPRI - United Nations Principles for Responsible Investment
UCITS - Undertaking for Collective Investment in Transferable Securities
ManCo - Management Committee
AIFM - Alternative Investment Fund Managers
IORP - Institution for Occupational retirement
EuVECA - European Venture Capital Fund
EuSEF - European Social Entrepreneurship Fund