Is ESG facing an existential crisis? What could be next for sustainable investing…
It’s been a rough year for ESG – Russian oil companies qualify as sufficiently environmentally and socially responsible to receive ESG funds. Sam Bank-Friedman’s bankrupted FTX crypto enterprise has a higher ESG score on ‘leadership and governance’ than Exxon/Mobil. In light of the discovery of controversial ESG fund allocation, it is vital ESG undergoes a significant and thorough re-evaluation to determine a clear-cut set of global guidelines. However, with public trust in the government and financial institutions in steady decline, is revamping the existing ESG framework enough to recover from the damage from the Russian oil scandal or does sustainable investing need a future free from negative associations?
The recent drive towards corporate responsibility doesn’t look to be slowing down. Demands for corporations to be held accountable for their decisions, for their regulations to be scrutinised, and for their reported data to be credible and traceable are rightly in the spotlight with pressure coming from seemingly everywhere; The public, changing government policies, and most notably, the United Nations 2030 Agenda for Sustainable Development.
What’s the UN 2030 agenda about?
In 2015, all UN member states agreed to the 17 goals set out by the 2030 Agenda for Sustainable Development. Broken down into 169 targets, each goal focuses on one of 4 key areas: human rights, labour, environment and anti-corruption.
The goals laid out in the ‘Agenda’ are ambitious and as of 2019, while progress had been made in certain areas, progress was uneven – between each individual goal and across different countries. Even before Covid19 hit (and the resulting cost of living crisis, rock bottom interest rates, and inflation), some countries (developing countries in particular) had made negative progress towards reaching targets. Progress has taken a significant hit since 2020, and in a way, Covid19 has actually been quite helpful. It has exposed deep inequalities, systematic shortfalls, climate damaging processes, dramatic increases in poverty and hunger, heavy reliance on a single country for the majority of stock supply, workers rights, the list goes on…
Uncovering these issues and admitting they exist is the first step towards addressing them.
The Post-Covid19 Sustainable Investing Opportunity
Covid19 has certainly provided a unique opportunity to relook at how we’re building society with sustainable development as a priority. In the process of saving economies, businesses and livelihoods, UN Secretary-General, António Guterres said government and financial investments should “drive a shift from a grey to a green economy” and “must deliver new jobs and businesses through a clean, green transition.”
In what is an almost-perfect storm, the post-Covid19 opportunity and the need to redefine ESG can be used together to channel investments into industries, companies and projects that are strongly aligned with one or many of the Sustainable Development goals or have pledged their support. Thus, accelerating the green transition away from more traditional investments. The highest rated ESG stocks in Europe rewarded investors with 12% outperformance in 2021, up from 0.4% in 2020, highlighting an existing trend towards sustainable investing. It’s worth remembering that governments are beginning to implement policies, schemes and levies that promote ‘greener’ operations and financially punish those who do not adhere; when coupled with the potentials presented by Covid19 and ESG, sustainable investing appears as the only logical option for high-returns, low-risk investing.
Another important consideration when considering the future of sustainable investing is The Paris Agreement, whereby 196 parties are legally bound to work towards limiting global warming to a 2 degrees celsius increase (compared to pre-industrial levels). Not only does this ensure governments work towards implementing climate policies, it also outlines a financial assistant agreement. Since significant capital is required to invest in climate initiatives, developed countries are encouraged to provide financial support to countries with smaller economies, such as Africa, in order to mitigate the financial burden.
This legal bind ensures governments are doing their bit towards creating relevant policies, guaranteeing the transition towards sustainable investing – whether that be through existing ESG funds or bonds or the development of new sustainable funds/bonds.
Overall, truly sustainable investing is a win-win scenario (not just greenwashing exercises). High return, lower risk investments are attractive for investors, and do some world good. Improvements to workers’ rights, education, and health care foster economic growth. Reductions in poverty, hunger and inequalities empower the general public. Responsible consumption, production and environmental consideration ensures economic growth is future-proof. Using the UN 2030 Sustainable Development Agenda as a basis for sustainable investing is beneficial for everyone’s and everything’s future.
What could be more beneficial?
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