Despite initial skepticism when it was termed in 2005, the focus on “ESG” (environmental and social impact, and company governance) has shifted from “do-gooder marketing play” to industry best practice throughout in the corporate sector. And it makes financial sense, too; the groundbreaking study “Who Cares Wins” disproved the notion that incorporating ESG factors into corporate policy hurt financial companies’ bottom line and proved instead that it was actually a practical long-term investment strategy.
Further, it also attracts capital markets investment from ESG or “impact” investors — a fast-growing cohort of the investing community. According to the 2018 Global Sustainable Investment Alliance Report, global sustainable investing assets total $30.7 trillion, and have increased by 34% in the past two years. Should firms need greater incentive to champion ESG initiatives, consider the impact on talent recruitment and retention. Ninety-four percent of Gen Zers believe that companies should address social and environmental issues. And millennials consider social responsibility when deciding which companies they want to support as employees, consumers and investors.
Of course, touting social responsibility efforts boosts companies’ reputations, but the importance of ESG goes far beyond public opinion or recruitment. This is particularly evident when it comes to the E in ESG. A measly 100 companies are responsible for more than 70% of the world’s greenhouse gas emissions since 1988. While it’s heartening to see eco-minded individuals shift their purchasing of lifestyle behaviors to be more kind to the environment, changing lightbulbs or ditching straws won’t affect the kind of change necessary to meet the UN’s climate goals. Established financial companies have an opportunity and, arguably, a responsibility, to leverage their klout to address global warming and to protect stakeholders from climate-related economic fallout.
For individual investors, sustainable investing is not only an ethical choice; it also functions as a risk-management strategy. Climate change related-phenomena have a tangible impact on a wide range of industries. For example, water scarcity is an issue for companies like Coca-Cola and McDonald’s, and industries from tourism to semiconductor manufacturing. Drought and other extreme weather events can halt production and damage earnings. Thus, investing in companies that are actively working to decrease their environmental footprints and reduce their dependence on protected resources protects the interests of shareholders.
Although responding to climate change requires hard work and often entails change, strong corporate leadership on this issue benefits everyone: financial firms, employees, consumers and the planet. We’re on the right path — more than 80% of the world’s largest corporations, including a long list of financial services companies, measure and track ESG metrics according to the Global Reporting Institute’s standards. And that which is measured improves. But we don’t have the luxury of time. ESG initially shifted from “do-gooder marketing play” to industry best practice. It’s long-past time it shift further to, well, the norm.