Investors who ignore global environmental, social and governance challenges (ESG) are exposing themselves to unnecessary risk. That was one of the main takeaways in a recent webinar I hosted titled, “How Should Investors React to The Changing ESG Environment?” The webinar gathered speakers from across the ESG universe, including asset managers, journalists, academics and analysts.
A changing climate is having an impact on weather patterns. Storms are becoming more frequent and hurricanes more severe. This year, Europe has been devastated by droughts, and Pakistan has been devastated by floods. Hurricane Ian barrelled through Florida, causing billions of dollars in damage, and forest fires have ravaged the global landscape.
Analysis by Deloitte shows that insufficient action on climate change could cost the US economy $14.5 trillion in the next 50 years. That’s just in the US. The total global cost could be far higher.
The webinar panelists discussed the cost of climate change and how investors should be factoring these headwinds into their calculations.
The cost of pollution
“I really think that ESG is about managing risk so that you can increase your ESG investing to increase your reward,” noted speaker Joan Michelson, ESG consultant and the host and executive producer of the ELECTRIC LADIES podcast.
Speaker Cary Krosinsky, a leading author and advisor on sustainable finance who also teaches at Brown, Yale and NYU, added that recent weather events are only accelerating corporate and investors’ desire to enhance ESG reporting. The trend is accelerating around the world.
Southern Asset Management noted that while ESG reporting is relatively new in China, the asset manager is making solid progress in building an ESG database, the Southern Fund ESG Comprehensive Information Platform.
This database contains internal and external ESG rating data, rich underlying data, climate-related databases, dispute events, voting tracking, and other multi-dimensional ESG information.
This database aims to enhance ESG reporting in one of the world’s most important
The goal of every asset manager is to find companies that will increase shareholder wealth over the long term. With environmental risks increasing year after year, it is becoming increasingly important that asset managers focus on companies that are making a positive contribution to the global climate.
Those that don’t could be left behind or could suffer significant financial consequences.
When analyzing potential investments for its ESG-focused portfolios, Southern Asset Management evaluates “the logic of the profit model” for each company by assessing both positive and negative factors, such as social costs and carbon-emission costs.
Climate issues are one of the critical areas where different countries could find common ground to work closer together in the future, the panel agreed. However, these are not going to be the only countries affected by climate change. The world needs to work more closely to establish a consensus on climate initiatives and drive better reporting by companies and governments.
Other factors to consider
ESG is not just about climate issues. It also involves social and governance issues, which are often overlooked by investors who tend to spend too much time focusing on the environmental factor.
However, social and governance issues are becoming increasingly important for companies to consider, and they go hand and hand with the environmental question.
Joan Michelson explained that the “beauty” of ESG, if done properly, is the fact that it takes all of these factors into account.
The speaker gave the example of ExxonMobil
Southern Asset Management is trying to drive change by engaging with companies as well, Lefeng Lin, fund manager at Southern Asset Management said.
Using metrics compiled by its carbon emissions database, the firm targets corporates with large emission footprints to help them gradually establish an ESG management structure. The overriding goal of this strategy is to help businesses “avoid the negative impact that climate change may have on their operations.”
Cary Krosinsky also noted that increased social engagement and improved governance by companies would help improve transparency, bring people together and, perhaps most importantly for investors, increase trust between shareholders and corporations.
Beware of companies that greenwash investors
Unfortunately, some asset managers have jumped on the ESG bandwagon and are not doing the detailed research required to distinguish between companies that really have good ESG rankings and those that are just greenwashing their investors. Some managers just pretend to do the work to grow assets and collect fees.
The panel agreed that one method to achieve outperformance through ESG investing is with detailed research and analysis, such as Southern Asset Management ‘s carbon emissions tracker.
Companies can game ESG rankings when criteria are well-known and published. However, it is much harder for businesses to game the system when they don’t know what they are being judged on.
This is why a unique, bespoke approach is so important and could help investors generate excess returns as the world becomes increasingly concerned about ESG factors and compliance by companies.