Why prioritising investments with environmental, social and governance (ESG) credentials is essential
Investors may not realise or not want to focus on the environmental, social and governance (ESG) elements of their investments but this attitude can lead to unforeseen consequences.
A ruling in The Hague last week against oil giant Shell ordered the company to cut carbon dioxide emission faster and deeper than it had planned. Similarly, in the previous week, Deutsche Bank chief executive Christian Sewing warned that lenders “risk losing their licence to operate” if they fail to make green finance a priority.
Green Finance is more easily understood through the underlying factors of environment, social and governance (ESG). So, what does ESG mean?
ESG refers to three central factors in measuring the sustainability of an investment. It was derived from the ‘triple bottom line’, also known as ‘people, planet and profits’ (PPP), a concept introduced in the 1990s. It argued that businesses should focus on each of the three ‘P’s and not just on ‘profits’, since they were equally important for any commercial enterprise to be sustainable.
Why do investors care to go green?
ESG considerations enhance risk-adjusted return potential by reducing investment risk and creating investment value. A well run and responsible company that cares about its people, customers and the environment can be considered more likely to exhibit a greater level of resilience and outperform its peers than one that does not. ESG analysis can provide valuable insights about factors that have a significant impact on the financial metrics of a company and therefore better inform investment decisions. So rewards can await those who put sustainability ahead of short-term gains.
Evidence that investors are going green
Accordingly to research from Unbiased, more than one in 10 people (12 per cent) have a plan to transfer into ESG funds this year and a further 17 per cent have plans to move within the next few years. Meanwhile, 70 per cent of investors said they would actively avoid putting money into companies with a negative environmental impact. Given that only a tenth of all investors currently hold any ESG funds, these intentions (if they hold true) should see the ESG market double in size this year alone. At the same time, the exodus from non-ESG assets could very well reduce their value, and so accelerate this trend. The research also found that more than a quarter of investors (28 per cent) are now considering higher risk/higher return investments with a direct focus on tackling climate change.
What is a Green Economy Mark?
London Stock Exchange Group is a global hub for sustainable finance. Its position at the heart of the global financial markets means that it is ideally placed to support issuers and investors in the transition to a sustainable, low-carbon economy, by enabling access to the deepest pool of capital. They introduced the Green Economy Mark in 2019, an accreditation which recognises listed companies and funds which derive 50 per cent or more of their revenues from environmental solutions. With a growing proportion of asset owners and managers seeking to deploy capital into sustainable investments, the Mark presents an investible universe of ‘green economy’ equities, enabling a broad exposure, rather than a focus on one area.
One such company offering a green bond
Verditek (AIM:VDTK), the international green technology company that develops, manufactures and sells lightweight solar panels, announced on Tuesday 1 June 2021 that it is issuing a corporate “green” bond to raise up to £500,000. Verditek will use the proceeds of the bond issue principally to provide additional working capital.
Verditek chief executive Rob Richards commented: “Verditek has a strong pipeline of potential projects and we are seeking additional working capital of up to £500,000 of which half has already been committed.”
The bond, yielding seven per cent, is being issued through crowdfunding platform Crowd for Angels. Security will be by way of a floating charge on the assets of the company. To find out more visit: https://crowdforangels.com/company/plc/verditek-plc-1054
Capital at risk. Tax relief subject to circumstances and change. No FSCS protection.