Strong financial performance — once virtually the only criteria of interest to investors — is no longer enough. Today’s investors are aware that strong environment, social and governance (ESG) performance is increasingly linked with stronger operational performance and higher returns. Data and performance on ESG metrics are increasingly important as individuals and organizations seek to understand companies’ long term sustainability.
For example, the Global Sustainable Investment Alliance (GSIA) estimates that ESG-focused investments represent in excess of US$30 trillion globally, and Deutsche Bank suggests this will double in the next three years (Fitzpatrick, 2019). At the beginning of 2018, some US $30.7 trillion in sustainable investing assets were under management across the five major markets worldwide (GSIA, 2019), following a 34 per cent increase in the previous two years.
“Investors are increasingly requiring companies to provide more disclosure on ESG factors that may have an impact on a firm’s long-term valuation – with a focus on credible, standardized information that helps investors assess material risk,” comments Ben Brunnen, VP, oil sands, fiscal and economics, Canadian Association of Petroleum Producers (CAPP).
And Jackie Forrest, senior director, ARC Energy Research Institute, adds, “Many investors believe we’re heading to a lower emissions future, so carbon tax and policies to reduce emissions are becoming more stringent over time. If you’re investing in oil and natural gas, you’re interested in lower-carbon production facilities because they’re likely to be more resilient, with less carbon tax, less environmental liability. These are business risks, and to attract investment capital a company must show action to address them.”
A developing field
According to a recent article in Forbes magazine, the term ‘ESG’ was coined in 2005. The concept builds on the older Socially Responsible Investment (SRI) movement. Unlike SRI, which primarily uses negative screening such as not investing in alcohol, tobacco or firearms, ESG investing is based on the assumption that ESG metrics are nonfinancial risks that are material to stakeholders and capture a more complete and transparent picture of the risks to a firm than financial metrics alone. To many investors, ESG information is vital to understanding corporate strategy and management.
Credible ESG data gives investors the opportunity to vote with their money. Disclosure on ESG performance can help investors identify companies that are well positioned for the future, and to evaluate how companies address risks arising from such business challenges as climate change, operational safety, and corruption. For government policy makers, ESG is a market-led means to ensure common societal values are not sacrificed for short-term profit and shareholder value creation.