Companies are gradually moving forward, making their processes more sustainable and consistent with the principles of the ESG. However, this will no longer bring much profit, as analysts say. What awaits the ESG market when interest in sustainability calms?
Companies are under increasing pressure on ESG issues from their stakeholders: investors, governments, environmental and other activists, employees, buyers, and customers. If these requirements are ignored, companies may face difficulties attracting financing, personnel problems, and customer churn.
In many ways, the catalyst for the demand for ESG was the pandemic, experts from the asset management industry agree. The pandemic crisis made people think about global things: environmental issues, health, social equality, security, data privacy, etc. People realized that the world had to change, and they chose to support companies that promised a sustainable future.
However, according to recent research, ESG ceases to be a powerful trend that allowed companies to raise prices for services and goods without increasing efficiency and quality. Sustainability was an occasion to improve competitiveness but has now become one of the requirements.
Risk and return have always been essential factors when choosing an investment. But ESG investing has adjusted this formula. ESG investors
make their choices not only depending on whether they meet their expectations for risk and return but also considering if such investments correspond to their values.
The development and standardization of requirements for instruments and market players have led to the rapid growth of the ESG bond market in the world. Deloitte analysts
believe ESG's assets should continue to grow, reaching nearly $35 trillion by 2025. Compliance of the company's policy with the ESG criteria means greater stability and reduced risks. However, heightened interest distorted the picture.
The success of ESG stocks can also be associated with the increase in the amount of money entering the market. For ESG companies, key rates are low, loans are cheaper, and the value of shares is rising because people buy them, not necessarily because of the company's financial performance.
It is also a statement by the authors of the article from the Institute of Scientific Beta
. Interest stimulates the inflow of money into ESG funds and individual stocks and accelerates their growth. However, the positive impact of the ESG hype on prices is coming to an end, and soon compliance with the principles of the ESG will require expenses more
than provide profit.
An extensive meta-analysis of NYU Stern
School of Business found a downward trend in the positive correlation between ESG and financial performance. Even though only 8% of cases showed a negative correlation between ESG and profitability, the market is already at the beginning of a tipping point.
Investors are unlikely to be able to get an increased return on investing in ESG-compliant companies. To change their operation following the principles of ESG, companies will incur costs, leading to a decrease in profitability in the long term.
Overheated expectations and inflated prices are going away, but that does not deprive ESG of its appeal. Even with reduced profits, investors are willing to compromise for the sake of the social impact they make with their decisions.
research has shown that many investors are enthusiastic to pay its price for ESG based on the idea of responsible investing. Social responsibility, focus on long-term consequences and sustainability remain important factors of choice when investing in recent years.
The ESG business model has proven its resilience throughout the challenges and crises of recent years. During the last major COVID market
drop in 2020, resilient companies were indeed able to provide their investors with a higher level of loss protection compared to ESG outsiders and even outperformed the market as a whole in this regard.
Amid growing interest in ESG, regulators have already announced
that they will tighten ESG disclosure requirements. Increased reporting requirements mean that, for example, impact funds that set environmental and social goals on a par with financial returns will need to back up their claims with clear accountability to ensure sustainability.
Companies, foundations, and government institutions will need to develop a general methodology and a global roadmap to ensure that responsible investing remains a significant factor. Much of the high ESG rates now have little to do with the actual transition to mitigation measures. There have not yet been revolutionary changes in public policy that allow green companies to become industry leaders. As new technologies
such as blockchain, the Internet of Things, and artificial intelligence enable better ESG data and climatology advances, government institutions, consumers, and investors will increase their requirements for compliance with ESG principles and increase support.
While the intentions of investors, customers, and states remain positive regarding the sustainable policies of the companies, new financial tools, government policies, and transparent business strategies will make responsible investing an entrenched course when the hype fades.