If we think about nature and the many things it offers us, like great beaches, forests and mountains, it is hard to imagine that investing in stock-markets would have anything to do with this.
But today it certainly does, and many companies listed on the exchanges around the world have to take note, think and report on how they make and deliver their products. In addition, they have to analyse to what extent they harm the wider environment in this process.
For example, if you are a large company making food products using palm-oil, the cost of burning the rainforest, and the loss of habitat and biodiversity due to mono crops (using only 1 type of tree instead of the wide variety needed to sustain an ecosystem) is so vast that the actual palm-oil would have to cost much more than it does today.
The harm to the wider environment is bigger and more costly than the actual product.
Green investing is wanting to bring the potential environmental harm onto the company’s balance sheet. So companies, at least the ones that want investor’s money, will have to make clear how dirty or clean their manufacturing processes are, and also how they plan to address it.
The Green investing movement is called ESG investing. ESG stands for Environmental, Social and Corporate Governance. It means that investors now want to or must know how companies score on the ESG criteria. And companies, wanting to be included in big investor fund portfolios, must embrace it.
The ‘E’ in ESG: The biggest investment fund in the world, Blackrock, warned its clients & investors in a letter in December 2020 that climate risk in effect creates investment risks. In fact, the E in ESG says that if companies harm and/or pollute natural resources, (like water, forests and clean air that belong to us all and hence harm the larger population for the benefit of shareholders), then they will have to account for it. They have to make it visible and talk about it in their annual statements and on their investor calls.
The ‘S’ in ESG stands for Social. Here the same principles apply. If a company only makes its product by underpaying and overworking employees, and possibly exposing them to hazardous materials or to a substandard working environment, this is deemed to be unacceptable and un-investable.
The ‘G’ lastly, stands for good management and governance. It addresses diversity, accountability and remuneration of the Board and protecting shareholders and their rights.
Wall Street, until last year, considered ESG investing as a niche activity, and being ‘green’ and ‘social’ was not directly seen as creating more value. However, this has been changing rapidly as it is clear that those companies who look after their workers and the planet, tend to be more successful and make more and better revenues. It could be as simple as that companies who want to adhere to ESG principles, are happier companies, and happier companies have more success.
So big investment and pension funds now increasingly sell off stocks in companies that do not comply with ESG standards. The wonderful consequence of this is that companies are doing their homework and are beginning to make great strides in bettering their credentials.
Taking a quick look at large oil companies like Royal Dutch Shell and Total SA (notorious polluters and greenhouse gas emitters), shows how ESG is forcing them to gradually switch out of oil and gas into renewable energy, both wind and solar.
ESG investing will shortly become the investment norm. And we will all be better for it. The numbers seem to support it as today about 40% of the $110trn of professionally managed funds are allocated to companies adhering to ESG standards (source Morningstar).
As Al Gore of Generation (a well-known green investment fund) said, “you don’t have to trade values for value”.
Recommended links:
www.FT.com Wall Street’s New Mantra. Green is Good.
www.Blackrock.com Larry Fink. Letters to CEOs 2020 and 2021.
https://www.bankofengland.co.uk/speech/2019/mark-carney-speech-at-european-commission-high-level-conference-brussels ‘A new Horizon’. Speech by Mark Carney 2019.
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