How ESG Is Helping in Building Corporate Value?
Nearly 25% of the total assets under management (AUM), globally, comprise investments in ESG.
Indeed, last year, global investments in sustainability touched a record peak of £12 trillion — a 40% increase, compared to 2019.
That figure is expected to further increase, as more investors and corporations are joining in.
Already, more than 50% of investors claim that moving forward, ESG will be critical to their portfolio.
There is no doubt that investing in ESG creates value.
And yet it seems that the practice has not quite caught the attention of investors in the UK. In Europe, ESG assets are estimated to be valued at nearly £3 trillion. Of that amount, the UK’s investment in ESG comprises nearly 10% — or £325 billion. However, globally, the UK accounts for just 2.5% of sustainable investments.
There are several reasons why this could be the case. Perhaps it is the fact that while we know ESG creates value, it is not clear how or why that is.
Let’s take a look.
How ESG creates corporate value
Investing in ESG is investing in corporations that prioritize sustainable growth over short-term profit.
Sustainable growth is a result of many different factors. At SG Analytics, this is what ESG consulting is all about — the recording and analysis of hundreds and thousands of different factors that inform investor expectations and determining how well those expectations have been fulfiled.
Though vastly different, we can classify all of them into three classes.
- Environmental factors represent practices that impact the environment. Consider the use of non-renewable sources of energy like coal that significantly contribute to greenhouse emissions.
- Instead, they must go green, like Qantas and Tesco, who are planning to bring their net emissions to zero by 2050.
- Equally critical environmental-friendly policies include animal welfare and waste disposal.
- Social factors relate to the disparate relationships a corporation maintains with different people and organizations.
- Investors who wish to invest responsibly invest in corporations that foster a community and promote freedom, diversity, fairness, and values that make our society a better place to live.
- This means fair labour, inclusion, and wage policies.
- Governance factors are corporate practices that describe the quality of their governance.
- Those corporations are frowned upon which are frequently involved in investigations or those who lack transparency. Or boards whose executives are found to be unethical or engaging in illegal practices.
- Investors demand accountability.
These three form what we call ESG. Their fulfilment leads to sustainable growth.
And now, it is not hard to see how.
By keeping a pulse on these factors, we can anticipate what investors want. Corporations, then, can re-adjust their strategy to fulfil their expectations.
Investing in ESG, therefore, provides corporations with a hedge against future risks. It always keeps them a step ahead.
ESG advisory matters more than you think
Here is a summary of the benefits of ESG investing:
- It helps explore new growth opportunities
- It enhances productivity by creating a healthy working environment
- ESG decreases the risk of legal interventions and hence infamy, and
- ESG Optimizes future-proof asset management
The point is that investing in ESG goes hand in hand with returns. However, we don’t just want returns. We want them consistently.
ESG advisory, then, must be a never-ending, ongoing process.
And the most fundamental aspect of ESG advisory is ESG engagement — the never-ending, ongoing conversation between investors and corporations that informs each other what they think.
Here are its three core functions.
- The primary goal of ESG engagement is to maximize communication value.
- To achieve this, engagement between investors and corporations must be active.
- But it must also be strategic, straightforward, streamlined, and efficient.
- Finally, the goals of both stakeholders must be clear and concrete.
- Once well-planned and robust ESG-goal reporting systems are built, a feedback system must follow. Without one, learning opportunities are lost.
- An effective feedback system is formed by discrete parameters or KPIs. Otherwise, ESG engagement becomes meaningless and vague.
- A discrete feedback system encourages measured learning, which leads to measured progress.
- For corporations, internal agreement on ESG policies is absolutely critical across all departments, from board executives to market analysts.
- To ensure the agreement is unbiased, inclusion, clarity, and transparency must be maintained at all costs. This promotes trust.
When you think about it, ESG doesn’t just help build private value. It also helps build public value. This is value for everyone.