Imagine a future in which companies that act responsibly enjoy better long-term returns, fewer litigation risks and are rewarded with lower borrowing costs. That future may be here sooner than you think, thanks to the growing appetite for environmental, social, governance (ESG) funds.
ESG funds received a boost in 2015 with the publication by Friede & Busch of a huge meta study of more than 2,000 research papers assessing the relationship between ESG and corporate financial performance (CFP). The researchers found not only no negative relation between ESG and CFP, they also found that the “large majority of studies reports positive findings”. Moreover, this was across a very range of asset classes.
This vote of confidence has led to a surge of investment. According to Global Sustainable Investment Alliance (GSIA) and Forum for Sustainable and Responsible Investment (US SIF), global ESG investment rose by 33% to $23 trillion between 2014 and 2017. MSCI Research, Morningstar and Reuters are just a few of those providing indices that allow you to track the performance of ESG companies or ESG funds against benchmarks. Morningstar reported in October 2017 that, 16 of the 20 equity indices in its Global Sustainability Index family had outperformed non-ESG equivalents over their lifespan.
The move towards a globally accepted standard or an agreed definition is an evolving process. One such example is B Corps, launched in 2006, which provides ‘B Corp Certification’ for over 2,500 publicly listed enterprises and small businesses in more than 50 countries. Certified companies must demonstrate that they “meet the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose”.
Perhaps the most important recent development for ESG funds is the move by all the major rating agencies to incorporate ESG into their company credit ratings. This has spurred another innovation, namely lower-cost loans tailored especially for high ESG-compliant companies. For example, Danone borrowed €2bn in February 2018 using a Positive Inventive Loan (PIL).
Unlike earlier versions of socially responsible investing, ESG does not exclude particular sectors outright. Certain sectors, by their very nature, use more natural resources or work across a broader range of cultures than others. Instead, the aim is to help investors pick companies that maintain the highest standards in their sector or asset class. Thus, an oil and gas company that employs the highest safety and environmental standards will score better (for example, be considered less vulnerable to litigation, or large fines, or social protest) than one which invests heavily in the health and safety of its operations and its workers.
Another reason for the growing interest in ESG investing is the range of initiatives to tackle climate change and income inequalities, together with the expectation that regulators will get tougher on companies that do not embrace them. The Cyprus Investment Funds Association (CIFA) is proud to have members focused on renewable and socially responsible investing, and we encourage qualified members to seek global ESG accreditation.
Marios Tannousis, deputy director general of CIFA and a board member of Efama
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