In my 25 year’s of life, there have been monumental changes in how we live our lives and how we understand our impact on the world. The decisions I make daily are inherently different from those my parents’ generation took when they were in their mid-20s. Not only do I recognise the positive impact of eating less meat, driving an electric car or eliminating our consumption of fast fashion, I can also see the power I have in where I put my money particularly with the long time frame I hope I have. Unlike my parents, it is now much easier to invest in alignment with my personal values – and I’m not alone. From my generation, nearly 8 out of 10 Millennials and Generation Z choose Environmental, Social and Governance (ESG) issues as a key priority when selecting where they put their hard-earned money. Of course, we want our money to earn a return, but we also understand the power we have in being active in deciding where our investments go and what nature of return we want them to deliver. With around $300 trillion within the global capital markets, and the largest intergenerational transfer of wealth we have ever seen well underway ($30 trillion), the potential for this money to be harnessed towards companies that have long term sustainable and responsible goals is great. For companies to successfully transition to becoming greener and more sustainable, they will need to look at and address where they are not meeting ESG expectations and adopt strategies to attract and retain the money of millennials and Gen Z in order to future proof their viability. So, what are Environmental, Social and Governance issues?
The beginning of this year saw the devastating effects of the Australian wildfires, the emergence of a global pandemic, flooding across the UK and further wildfires throughout California spreading to most of the West coast of the US. If this year has taught us anything it is that the consequences of climate change are here right in front of us and that change is needed fast.
The impact of the Coronavirus pandemic on oil price volatility at the beginning of the year has had a lasting effect on the demand for oil. It was reported in May 2020 that BP had written off £17.5 billion of stranded assets, as the company acknowledged that the impact of the pandemic was likely to accelerate the transition to a lower-carbon economy and demands for cleaner sources of energy. Not only was this brought about due to the lack of human travel and movement but also consumers changing attitudes towards where they are investing their money. Dividend cuts administered by many companies during the onset of the pandemic led consumers to look beyond the dividends that they had previously received to what the fundamental commodity that they were investing into was, and spurred on by this understanding, many have made the transition to more renewable and green sources of investment.
Whilst Shell and BP are investing heavily into green and renewable sources of energy they still have a long way to go – and disasters like the Mauritius oil spill that occurred over the summer do little to help the public perception of “big oil” trying to improve their environmental impact. The perception and image of companies being seen to incorporate both ESG and sustainable processes into their day to day operations is becoming key. The damage that it can do to a company’s marketability and reputation is substantial. It was revealed that Rio Tinto was set to remove 124 of the 327 46,000-year-old Aboriginal heritage sites in the search for iron ore and the CEO stood down shortly after the backlash faced in the media and mounting pressure by shareholders and society, demonstrating their power. Rio Tinto, an incredibly successful and large company could have turned a blind eye but the way they s responded so quickly to this event signifies a new wave of consciousness where it isn’t enough to simply be bystanders to such occurrences. Companies must actively use their powers to dispel the narrative that they are purely financially driven, even if it is just to boost their ESG ratings!
The Social “S” component within ESG has historically been inherently difficult to assess and has therefore been frequently overlooked to its “E” and “G” counterparts. However, moving forward into a post-pandemic world its prominence should not be underestimated. The emergence of Covid 19 has disrupted supply chains, and global lockdowns have shone a bright light on those companies that have built their stakeholders and employees into their business models, and those that have not. For example, J D Wetherspoon was in the spotlight earlier this year over not paying employees once lockdown began. On the other hand, LVMH announced back in March 2020 that they would be moving their production line within their perfume factories to creating hand sanitizer due to the overwhelming global demand. Not only has this enabled them to keep their factories open and keep employees working but it has allowed the company to position itself and show that it is thinking about each and every stakeholder. These practices will be vital in attracting and keeping investors, a sentiment felt by Larry Fink who stated in July this year that “one thing that is apparent in this Covid world…the companies that focus on all their stakeholders — their clients, their employees, the society where they work and operate — are the companies that are going to be the winners for the future.”
Governance covers a range of areas from the board of a company, to NGO’s and governments themselves. Investors are demanding companies to be more and more transparent in how they conduct their business and demonstrating the values they apply in their decisions. For example, the ability to use negative screening can help investors to identify those companies who pose significant risk to investors ESG considerations due to their unsatisfactory governance policies. These issues can range from not responding to environmental damage that they are contributing to or lacking gender and ethnic diversity, both within the company and on the board. Look at the damage Volkswagen did to themselves when it became clear that they had sought to cheat on emissions tests. Investors voted with their feet and the company lost €14 billion in market value.
The past few years have seen a big push to improve gender diversity and equality within institutions. Individuals are increasingly vocal about working for businesses and buying products that reflect their diversity and inclusiveness. This is going to be vital for employers in attracting employees. A recent study found that 90% of Generation Z strongly supports the Black Lives Matter movement and that those companies and institutions that do not clearly discuss and implement anti-racism policies risk losing this generation as current or future customers or employees. Further, recent research from Morgan Stanley demonstrated that a better balance of men and women in the workplace can deliver returns with less volatility, making gender diversity not only a more positive work environment but also profitable for companies and investors. However, adopting policies that include anti-racism efforts and green initiatives, shouldn’t be a quick fix and tick box exercise – Millennials and Gen Z will see through PR and marketing stunts and any “greenwashing”. The steps put forward must be both profound and multifaceted so that we can trust in companies that they will keep these changes in place and seek to constantly improve them.
The future of ESG
The disruption caused by Covid-19 has shone a very bright light on the fractures within many business models and their role in society – the goal for all should be to create strong, resilient and sustainable business models that have the ability to weather the next global event, whether this be natural disasters due to ever-increasing global temperatures or the possibility that global pandemics may become an all too familiar occurrence. Sustainable investing is no longer a niche. Its popularity, as we have seen over the past couple of years, is growing substantially. No longer should investing be seen as a vehicle to produce the maximum financial return possible but as a force for change that can transform the way that we and future generations live. Yes, I want a return on my investments – but that return is much broader than financial impact. I care passionately about the world that I live in and I want to actively contribute to its long-term sustainability and health. The disciplines of ESG investing are allowing me to do that.
Olivia is part of the Charles Stanley Professionals Network; designed to connect and educate the next generation of investors. Read more articles from our network contributors and find out how you can be part of the network.
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