ESG standards (Environmental – protection of the environment, Social – social development and Governance – effective corporate governance) are the criteria by which it is assessed how successfully a company or country (or a city) is moving towards achieving sustainable development. The ESG indicator determines not only the reputation of a company or its value in the long term, but also its assessment by creditors, investors, counterparties and clients (especially foreign ones) – and even employees. 86% of employees want to work for a company whose values they share.
More specifically, this is what ESG companies / cities usually have in their sphere of interest:
Ecology. It is about combating environmental pollution, the depletion of natural resources (forests, rivers, lakes) and the change in the Earth’s climate caused by the same greenhouse emissions and ozone holes.
Social development. This concerns the quality of life of employees, working conditions and gender equality within the company. An important factor is customer and community care, which is reflected in the support of education and social projects.
Corporate governance. Here, honest and maximally transparent business conditions come to the fore. These companies publicly publish financial data and other sensitive information.
Ask, why take on so many obligations? It’s simple: the principles of sustainable development affect the structure of the business and the reputation of the company. Large investors, partners and counterparties pay attention to the presence of the ESG agenda. For them, it is a “litmus test” of business maturity.
Smart Cities Embrace ESG as Foundational
Smart city is a concept of a new generation city, which provides for effective management and ensuring a high standard of living of the population through the use of innovative technologies.
Smart Cities address ESG goals in managing physical assets, community services and resources, public transportation and traffic management, optimized energy consumption, water supply, waste management, and public safety. Cities can manage and optimize energy consumption through intelligent electricity meters, dynamic electricity prices, automatic street lighting, and instruments for observing and changing human behavior in response to external risks.
By adopting ESG, cities can create opportunities and investments to tackle sustainability, improve the quality of life, and pursue smart growth at the same time.
What is ESG Investing?
Responsible investing is an investment approach that seeks to integrate environmental, social and governance factors (ESG factors) into investment decision making for better risk management and sustainable long-term return on investment. It is an ethical investment that takes into account not only the benefits, but also the impact that the investment has on society and the environment.
Investment funds are increasingly relying on them to screen stocks and bonds issued by an organization. The idea behind this movement is that capital markets are capable of changing business behavior without government assistance.
Today, an increasing number of investors around the world are choosing companies and securities responsibly, paying particular attention to their compliance with the principles of sustainable development.
• According to the Global Sustainable Investment Alliance, nearly $ 40 trillion is held in ESG assets around the world.
• According to forecasts by Bloomberg Intelligence, ESG’s assets will reach $ 53 trillion by 2025, accounting for a third of total global investment.
About ESG ratings
The ESG rating represents the agency’s opinion on the extent to which the company’s key business decision-making process is focused on sustainable development in the environmental, social and economic spheres.
ESG rating is not credit and is determined on the basis of assigning a company to one of six rating levels according to the applicable scale. Assessing the level of the ESG rating, along with the assessment of the credit rating, is an important characteristic of the company’s activities. At the same time, in the ESG ratings, the main emphasis, in contrast to credit ratings, is placed on the company’s commitment to responsible conduct of its activities in the environmental, social and economic spheres.
ESG ratings are used to assess the effectiveness of company management and predict potential corporate risks, as well as risks in the environmental and social spheres. In addition, the presence of an ESG rating can increase the interest of investors and clients who are focused on working with those companies whose activities are consistent with the principles of sustainable development. Against the background of global climate and environmental changes, as well as the growing importance of a socially responsible approach to doing business, the need to assess the integration of sustainable development principles into the business processes of companies will continue to grow.
There are a bunch of ESG ratings from various analytical and investment firms: MSCI, Sustainalytics, FTSE, Vigeo Eiris, ISS, TruValue Labs, RobecoSAM and RepRisk. Rating compilers evaluate companies in different ways, which can cause the ratings of the same companies to vary greatly from one assessor to another.
The future of sustainable investment
Millennials, who number more than 79 million in the US, are overwhelmingly in favor of value-based investing. According to a 2019 Morgan Stanley study, 9 out of 10 active millennials believe in sustainable investing.
Experts are confident that it is for this reason that ESG funds grew by more than $ 285 billion in 2020 – 96% more than in 2019. In the decades to come, millennials are expected to inherit $ 30 trillion in cross-generational transfers. Therefore, we can say that ESG is just beginning to restructure capital markets.
Some ESG funds are already hitting records. The Baillie Gifford Positive Change Fund has grown by more than 50%. The fund focuses on companies that have a “positive impact” on society, such as Tesla and Moderna.
The growth of many funds seems to be due to the positive coverage of their portfolios with good ESG ratings in the industrial media. Vanguard, iShares (a division of BlackRock) and other lesser-known companies such as Stewart Investors and Parnassus have also received billions from investors who believe that ESG is not only humane, but also profitable.