Institutional and private investors increasingly count social and environmental impact when making decisions about their investments. The rapid growth of responsible investment forces corporations to follow global trends, develop sustainable technologies for their processes, and make them transparent.
One of the world's requirements of responsible investing is to test the company for compliance with the principles of ESG (Environmental, Social, and Corporate Governance). This index represents the company's strategy, employee working conditions, and how the company cares about the environment.
According to Morgan Stanley
, 66% of consumers willing to pay more for sustainable products. Thus, ESG becomes one of the key indicators for investors.
Generally, there are 6 principles of ESG investing. These principles are enshrined in the document
"Principles of Responsible Investment" supported by the UN.
According to EY
, environmental principles include Climate Change, Greenhouse Gas Emissions, Depleting Natural Resources (including Lack of Drinking Water), Waste and Pollution. Social principles are Working Conditions (including Slavery, Child Labor), Local Community, Health and Safety, Gender Equality. Management principles refer to Reward of Top Management, Bribery, and Corruption, Political Lobby and Donations, Structure and Gender Board of Directors, Tax Strategy.
ESG metrics provide insight into brand value and reputation. ESG factors can significantly affect the company's image and capitalization. It is not enough for a company to simply show rapid and sustainable growth, but also demonstrate values and open policy.
Green investing is an area of special trust and an open information environment that only technology can make trustworthy. Companies are turning to technology to demonstrate compliance with principles, conduct internal analytics and reduce environmental impact, and maintain healthy social and financial policies. Tracking internal processes
using IoT sensors, maintaining internal document flows through a distributed ledger
, and deep analytics through AI turn companies into sustainable digital organizations focused on long-term positive outcomes.
Private investors are increasingly interested in socially responsible investments (SRI), which are aimed not only at making a profit but also improving the environment and society. To do this, they purchase shares and bonds of companies that work for the benefit of the environment and society.
For example, some companies develop and use green energy, trying to minimize carbon emissions and pollution, or regularly transfer large sums to humanitarian projects and philanthropy, build hospitals and schools, etc. When deciding whether to invest in a company, the investor evaluates it based on a positive filter (if the company meets the requirements of ESG) and a negative filter (if the policies of the company contradict them).
According to PwC
, the amount of capital responsible investment increases by a third every two years. At the same time, about half of all managed assets in Europe are classified as assets of responsible investment, and 83% of investors pay attention to the climate risks of portfolio companies.
In February 2020, ETFGI
researchers announced a new record of $82 Bn of assets invested in ESG ETFs and ETPs.
Since 2014, there has been a positive relationship between responsible investment and the profitability of securities. As PwC notes
, the most used responsible investment strategy is the exclusion strategy. An example would be the exclusion from portfolios of assets including mining, gaming, tobacco, and alcohol production. In 2018, 985 institutional investors from 37 countries excluded $6.24 trillion in assets from their portfolios (an increase of 25% compared to 2016). In 2018, the Danish pension fund PKA
sold its stakes in 70 coal companies and 35 oil and gas companies as its contribution to the Paris Climate Agreement.
revealed that ESG funds were more stable and resilient during that turbulent period. The Dow Jones' SP analysis notes that ESG portfolios, despite the high volatility of the global market, bring more benefits during the COVID-19 crisis
. This fact determines favorable forecasts in the longer term.
Investors who invest in green technologies and sustainable companies are guided less by material incentives, more by considerations of responsibility. They are sometimes even willing to overpay for an idea. From this point of view, the crisis can hardly affect the position of the investor. The volume of responsible money in the world is constantly growing.
Against the background of the COVID-19 pandemic, the interest of investors in ESG indices is growing, PwC experts say
. Assets in European sustainable development funds will reach €7.6 trillion ($9 trillion) in the next five years, exceeding the size of assets in traditional investment funds, PwC predicts.
Until recently, investments that went beyond traditional financial criteria in-stock selection and took into account ESG criteria were niche areas. However, according to the study by PwC, by 2025, ESG funds' assets could more than triple, and their share in the European asset management market will increase from 15% to 57%.
Although ESG factors have become one of the key indicators for investors
, there is no particular methodology for assigning ratings to companies based on them. For now, ESG principles are based on the goodwill of companies, transparency, and accountability. The use of IT and IoT systems will bring more standardization and transparency to this area in the near future. Companies, institutional and private investors must develop transparent communication policies and build trust to make the world a better place together.