This week: biodiversity vital for sustainability, ESG insights from top players, what keeps retail investors out of ESG, countries get behind impact investing
Biodiversity is vital for sustainability.
All species have specific roles of species in maintaining ecological balance.
The availability of many essential goods and services such as agriculture, medicines, and food are dependent on maintaining that balance.
Despite its importance, there is currently a lack of funding in this area. Therefore, IDT created the sustainability award to facilitate advances in medical, environmental, and agricultural innovation.
The IDT Sustainability Award 2017 is open to researchers in Canada and the US in academic, nonprofit, and government labs.
Now in its third year, the awards have benefitted wide-ranging biodiversity projects from the role of methane oxidizing bacteria in limiting greenhouse gases, to projects highlighting the importance of sustaining biodiversity in groundwater, seed banks, and the microbiome of birds.
- Applications are being accepted until December 1, 2017.
- First, second and third place awards will be $25,000, $18,000, and $10,000, respectively to be credited toward the proposed research projects of applicants. Winners will be announced in January 2018.
“This award provides a unique platform for recognizing and rewarding innovative scientists as they work to advance sustainability.” -Elizabeth Walder, IDT’s Chief Sustainability Officer
Skytop Strategies seeks to create an arena for experienced professionals to navigate large-scale concepts and implement sustainable, ethical and productive practices.
Skytop Strategies’ Generating Alpha Conference held in NYC on October 30th focused on understanding potential risks and opportunities in the ESG investing space.
Some takeaways from the conference:
- “ESG is a long-term driver for top performance.” — David Yeh, managing partner, Capitol Hill, and former senior advisor to the White House.
- “We think of ESG and sustainability in a holistic way, it’s not about governance or environmental against social issues.”— Mariela Vargova, senior vice president, sustainability and impact investments, Rockefeller & Co.
- “Today, the most dynamic growth area in emerging markets happens to be where the ESG practices can add value or competitive edge.”— Liz Su, emerging markets portfolio manager, Boston Common Asset Management.
- “Active contrarian ESG investors win.”— Hazel Henderson, president and founder, Ethical Markets.
“This is the wave of the future.”— Robert McGarrah, Corporate Sustainability Attorney, Esq.
Companies that respect the environment, are managed for the long-term, use their human resources wisely, are likely to make better investments.
However, the message that incorporating ESG criteria is an easy way to deliver strong investment performance, rather than just to manage risk, has not been widely understood.
In 2016, assets under management dropped 4.1% but socially conscious net flows increased, adding 5.5% to existing assets under management.
Boston Consulting Group’s Total Societal Impact Report supports a direct correlation between a company’s score on ESG and its performance.
The analysis looked at more than 300 of the world’s largest companies and showed that EBITDA margins (Earnings Before Interest, Tax, Depreciation and Amortisation) and valuations were higher for companies who scored higher on ESG criteria.
The areas linked to the biggest impact on valuations and margins differ by industry:
- Consumer Packaged Goods – Top performers in topics that protect against negative events or risks, such as implementing a food safety management program, showed a valuation multiple premium of 11% compared to median performers in those topics. Gross margins were 4.8 percentage points higher, for companies that were the top performers in socially responsible sourcing than for the median performers.
- Biopharmaceuticals – top performers in downside topics such as conducting ethical human clinical trials had a valuation multiple premium of 12% compared to median performers. EBITDA margins were 8.2 percentage points higher for the top performers in expanding access to drugs than for the median performers.
- Oil and Gas – Top performers in downside topics such as avoiding and combating corruption had a 19% valuation multiple premium compared to median performers. EBITDA margins were 3.4 percentage points higher for the top performers in maintaining process-oriented health and safety programs than for the median performers.
- Retail and Business Banking – Top performers in downside topics such as securing business and personal data had a 3% valuation multiple premium compared to median performers. Net income margins were 0.5 percentage points higher for top performers in promoting financial inclusion and 3.4 percentage points higher for top performers in environmentally responsible sourcing.
In spite of the correlation between higher valuations and higher scores on ESG criteria, many retail investors are not interested. Why?
Complexity – ESG criteria covers a broad range of topics. Is it enough that funds avoid the bad guys (tobacco, guns) or do they need to prove measurable impact? And what impact? Where?
It’s true that values are diverse but even isolated ESG criteria can make a real difference.
For example, it’s clear that companies promoting gender diversity do better than other companies.
A number of investment groups have launched gender ETFs, such as the Lyxor Global Gender Equality ETF or the SPDR SSGA Gender Diversity Index ETF (SHE), that invest in companies with a good track record on equality.
The Solactive Equileap Global Gender Equity Index has outpaced the MSCI World by around 12% over the past five years.
Sustainability is really just about proper alignment of interests.
What is the point in a pension fund beating a benchmark, if it has to invest in companies that push up utilities prices for pensioners in order to do so?
Companies that respect the environment, are managed for the long-term, and use their human resources wisely, are likely to make better investments.
While ESG criteria may currently be complex, retail investors will only be able to ignore this space for so long before it starts to affect their returns.
Sustainability is climbing up the political ladder in a variety of countries.
While each country is in different stages and faces different challenges, it appears that the dial is moving in the right direction.
- China – last year issued guidelines for establishing a financial system to invest in green sectors while restricting investments in those that pollute the environment.
- France – adopted its Energy Transition for Green Growth Law this year which strengthens disclosure requirements for listed companies and introduces carbon reporting for institutional investors.
- Germany – unveiled its Frankfurt Declaration in May to accelerate the mobilization of sustainable market infrastructures. In October, the Deutsche Börse and the German Council for Sustainable Development unveiled a Hub for Sustainable Finance (H4SF), to review regulatory issues and develop market incentives and instruments to encourage sustainable finance.
- Brazil – has just launched Green Finance Lab, which aims to drive billions of dollars of private investment to the low-carbon economy by identifying, developing, and supporting transformative sustainable finance ideas.
- UK – recently announced a Green Finance Taskforce to accelerate the growth of green finance and deliver the investment required to meet the UK’s carbon reduction targets.
The PRI, the world’s leading proponent of responsible investment, along with the United Nations Environment Programme Finance Initiative , has been busy publishing fiduciary duty roadmaps in eight countries, with recommendations to implement clear and accountable policy and practice that embraces the modern interpretation of fiduciary duty.
The PRI has also launched several projects that address the underlying barriers to a sustainable financial system.
A sustainable financial system creates a more prosperous world.
Asia Index Private Ltd, a joint venture of S&P Dow Jones Indices and Bombay Stock Exchange (BSE) is launching an environmental, social and governance (ESG) index to measure securities meeting sustainability investing criteria.
The S&P BSE 100 ESG Index, which uses the S&P BSE 100 as its universe, excludes all tobacco producing companies, all companies producing controversial weapons and all companies at or below the bottom 5 per cent of the United Nations Global Compact (UNGC) score.
“We are proud to bring the S&P BSE 100 ESG Index to the market and help propel the participation of the Indian capital markets in ESG investment strategies,” – Asia Index CEO Alka Banerjee
Ashishkumar Chauhan, MD & CEO of BSE added that the exchange is looking forward to this index helping attract ESG-focused investors.