Environmental, Social and Governance (ESG) investing is increasingly becoming a phenomenon on the world’s capital markets. ESG is a demand-driven aspect of investing, as today’s investors, especially the younger generations (partly gen. Y, the millennials, and younger), are not only concerned with the return and risk of their investments, but also the impact they are making with them. This impact can range from workplace diversity to environmental footprints, including hundreds of factors that are examined periodically for a growing number of companies worldwide. Based on their factor scores, companies are ranked and benchmarked against each other.
Generally the goal of corporations is to maximize profit and the return on investment for shareholders. Until the beginning of the century environmental pollution was considered to be a price to pay for faster growth and profit, now, however, we are witnessing that pollution is starting to reduce economic growth. Money spent on environmental protection, such as clean air and water, is not just a cost, it is an investment that produces a measurable return.
To get a better grip on the exact environmental values of ESG, we have prepared a thorough overview on what values are factored into the ESG theory.
The environmental component requires research into a variety of elements that illustrate a company’s impact on the Earth, in both positive and negative ways.
- Greenhouse gas emissions goals, and transparency into how the company is meeting those goals: currently over a third of the world’s 200 largest companies do not fully disclose their greenhouse gas emissions (GHG) and from the 2,900 companies covered by Arabesque just over half of the companies (53%) have a near term score that aligns with the most ambitious Paris Agreement goal of keeping global temperature rise to 1.5°C, only a fifth of the companies (20%) are expected to remain on this pathway by 2050 without taking drastic steps to reduce GHG output.
- Carbon footprint and carbon intensity (pollution and emissions): the top 20 fossil fuel companies whose relentless exploitation of the world’s oil, gas and coal reserves are responsible for 35% of all energy related carbon dioxide and methane worldwide in the past 50-plus years. Among these companies are ExxonMobil, Gazprom, Chevron and Saudi Aramco, the state oil company that plans to go public amid a rising tide of environmental activism.
- Usage of renewable energy including wind and solar: Each year, Intel uses around 3,100,000,000 kWh with the company drawing its energy from wind, solar, hydro and biomass. Their commitment to going green comes with the installation of 3 million square feet of solar panels at sites in 9 countries according to their corporate responsibility report. The company states that since 2012 they have invested $185m across 2000 energy conservation projects. 100% of the electricity Intel uses in the U.S. and EU comes from renewable and green energy sources.
Asset owners and portfolio managers overseeing trillions of dollars seek to incorporate ESG considerations into their investment process where investment firms have a unique sales opportunity to combine the product-level ESG features of an investment with the clients’ profile based on their ESG preferences and recommend products that suit them best in a hybrid advisory model. In order to understand where to start, click here and download our fresh whitepaper, which gives a detailed overview of the growing popularity of ESG investments and explains the benefits of incorporating ESG-based profiling features in the investment ecosystem.
Stay tuned. We are going to publish two additional blog posts in this topic about S(ocial) and G(overnance).