2020 is marked by urgent global sustainability issues that are deeply inter-dependent. It was once universally understood that the main objective of a company was to maximize short-term returns for shareholders, disregarding its socio-environmental impacts. Now, safe-guarding human health, climate action and stabilizing the economy has become a matter of urgency. As companies face rising socio economic complexities, investors have to re-evaluate traditional approaches and navigate uncertainty with investment strategies that are sustainable and offer potential for risk-adjusted returns. Satgana recognizes the inherent need for responsible investing. To play a catalytic role, we want to pursue companies that will have a successful triple bottom line approach.
The Who Cares Wins: Connecting Financial Markets to a Changing World report published by the United Nations laid the foundation of environmental, social and governance (ESG) investing. Based on the principle that better investments lead to more sustainable societies, the consideration of ESG issues is increasingly seen as part of a shareholder’s fiduciary duty. ESG are the three central factors in measuring the sustainability and ethical impact of an investment in a company. It covers a wide spectrum of issues that aren’t traditionally part of financial analysis yet have considerable financial relevance.
Numerous policies and cultural shifts are changing the course of the ESG landscape, especially in major economies. Key drivers behind the ESG investment boom include public awareness, corporate pressure and government regulations. Many investors recognize that ESG information is vital to understand corporate purpose, strategy and the management quality of companies.
According to the Financial Times, ESG-focused equity funds have taken in nearly $70 billion of assets over the past year, while traditional equity funds have suffered almost $200 billion of outflows over the same period. This has led to ESG becoming a business imperative for asset managers. The world is changing, and companies need to adapt in order to deal with the resulting challenges and stay competitive and resilient.
GCA Altium published an in-depth analysis of ESG and its market performance. Over 70% of the major ESG funds are outperforming the S&P 500 during the pandemic. Further, over 89% of studies show that ESG assets outperform the market in the long-run. More stakeholder-oriented firms also appear to be faring better in the short term and making choices that will set them up for future success. Companies with robust ESG practices display a lower cost of capital, lower volatility and fewer instances of corruption. Strong macro trends and support from investors show that integrating ESG factors correlates to long-term financial returns.
The pandemic has been the ultimate test of company resilience worldwide. The MSCI reiterates that companies with high ESG ratings are better prepared and less exposed to systemic risks. Désirée Lucchese, an ESG specialist at MSCI, says there has been a growing focus on the social and governmental elements of ESG. Specifically, good governance allows for better management systems. Through its ESG rating, a company has access to strong data-driven audits and thus a greater understanding of every facet of its operations.
ESG investing is approaching a critical inflection point. The collective call for change is growing louder and investors are increasingly taking a stand through their investment choices. We are beginning to see the call for circular models as a critical part of a business’s post COVID-19 strategy. This shift will see an increased demand for ESG data as the foundation to build and quantify the sustainability initiatives implemented. Satgana embraces responsible investing, allocating capital based on a company’s ESG performance. We understand that ESG’s rising profile offers opportunities to increase societal value creation. To deliver on these promises, ESG strategy, policy and metrics are needed to embed a culture of sustainability throughout a company’s operations. Armed with a more holistic outlook, companies can identify a broader range of risks and opportunities for value creation and improve resilience to disruptive events. This is paramount for a company that wants to address evolving risks and stay competitive.