Most of the people in the region and the world have taken the necessary steps to reduce their carbon footprint, by taking public transport instead of driving or eating less meat. However, many are probably unaware of how 27 times more effective simply transferring a pension to a sustainability fund can be.
Corporate sustainability goes beyond just preserving the environment. A sustainable business also treats its employees and customers fairly and has strong decision-making processes at all levels.
ESG (environment, social and governance) investing gives investors a framework to assess to what extent an investment is likely to be sustainable and sustainable. Think of it as a lens for evaluating an investment in addition to its financial performance.
Each element of ESG investing targets a certain criterion, from how a company manages waste to how it interacts with its communities.
Environmental criteria assess how a company manages its waste, its resources and its environmental impact, such as its carbon footprint. An environmentally friendly business is more likely to gain the trust of the public. As governments move towards more climate-friendly policies, these businesses are also more likely to thrive.
Social criteria assess how a business interacts with its communities. A socially responsible company would treat its employees fairly, source a fair workforce, and have diversity policies.
Organizations impact the livelihoods of entire communities and are more likely to thrive when those who come into contact with them – whether as customers or direct or indirect employees – are satisfied. This has multiple benefits that affect a company’s bottom line: from higher employee retention rates to strong community and industry representation.
Governance criteria assess a company’s decision-making framework and legal compliance. Strong governance ensures that companies distribute their resources fairly, deal appropriately with bribes or fraud, and avoid conflicts of interest at the board level. Companies with strong governance are more likely to practice fairness and transparency throughout the organization and to be more stable over the long term.
ESG is not the only sustainable investment strategy, there is also socially responsible investing, which goes even further by actively eliminating investments based entirely on ethical criteria. In addition, there is impact investing, which only considers the impact of an investment on sustainability, regardless of its financial performance.
ESG differs from these other sustainable investment strategies because it is based on traditional investment plans. This means that ESG focuses not only on the financial performance of an asset, but also on its impact on sustainability.
This shows that ESG offers an entry point to integrate sustainability and social impact into traditional investing. However, the way experts define and regulate ESG will likely change over time as they find ways to measure criteria more quantitatively.
Environmental and social practices are still neither universally regulated nor quantifiable in financial terms. These factors make ESG regulation difficult compared to traditional investing, which has set standards for financial reporting.
Despite the lack of transparency on ESG measures, some institutions have developed an ESG rating to help fund managers create ESG-friendly portfolios. MSCI, a US finance company headquartered in New York, for example, designates ESG ratings based on how a company manages its ESG risks relative to other companies in the same industry.
Currently, several ESG organizations and International Financial Reporting Standards are taking steps to standardize ESG criteria. These steps include collaboration in efforts with other institutions to create universal standards.
In the past, many investors believed that incorporating ESG criteria into a business model would come at the expense of a company’s returns and, therefore, their own investment returns. After all, a business should take extra steps to make sure its operations don’t harm the environment, like buying carbon credits or investing in renewable energy.
Social and governance measures include paying fair wages, making hiring decisions that reflect the diversity of a community, and implementing strong internal controls. All of these actions require time and resources.
But, in fact, companies that are sustainable are more likely to generate scalable returns than those that do not prioritize ESG.
Beyond the ethical advantages that ESG offers, this investment model is practical because its framework can help investors identify sustainable companies. Investors can use ESG to avoid investing in companies that engage in risky or short-sighted behavior, which can cost a company and its shareholders more.
Despite the challenges of ESG regulation, growing awareness and high returns are driving its demand. In early 2018, $ 11.6 trillion in assets were chosen based on ESG criteria, up from $ 8.1 trillion two years earlier.
Closer to home, the United Arab Emirates’ Securities and Commodities Authority issued a circular in April this year stating that all listed companies must submit a stand-alone sustainability report by June 30.
The Abu Dhabi Stock Exchange and the Dubai Financial Market have formally committed to fostering the sustainability of financial markets by joining the United Nations-led Sustainable Stock Exchange Initiative.
Overall, investors can expect greater visibility on ESG metrics going forward, and companies will need to adapt to global pressure and local sustainability regulations to thrive.
So, when evaluating long-term investments, investors should check their sustainability and not just their profitability.
Ramzi Khleif is Managing Director of StashAway Mena.
Update: December 20, 2021, 4:00 a.m.