Sustainability encompasses a vast range of problems and challenges. ESG (environmental, social and corporate governance) is arguably the most used (at least increased) phrase in finance. It refers to measuring the sustainability and societal impact of an investment by a company or individual. ESG has become one of the first topics in any business meeting or financial publication. Increasing in demand and supply, ESG strategies has become and will continue to be a fundamental property of every business and investor.
ESG investments is not a newly formed financial bubble bred out of greed for higher returns or simply boredom over the pandemic. In 2000 there was a drastic increase for investors interest in ESG in companies. Figure 1.1 shows the how share price of an exchange traded fund run by investment firm Invesco, the fund comprises of large US listed firms actively engaging in the advancement of cleaner energy and conservation (ESG strategies). Therefore, suitable to show investors demand for ESG products over a 20 year period. Battery technology firms, electric vehicles, solar, wind power, and even industrial firms who have targeted renewable energy sources like rhodium have seen their share price rise over the last year. SPAC (special acquisition company) also known as a blank cheque company have grown endogenously from green energy investment strategies and provides a new form of public funding for ESG initiative companies. There is the argument of an overvaluation for some of these companies, for example Tesla has seen its share price rise 923.25% from $86.86 at the start of the pandemic to its peak on January 24th 2021 where it was $880.80 per share. Large increases in valuations and share prices is a common theme investors study to determine the fear of another bubble.
However, the dominant viewpoint determines ESG investments will be the future and not a fad. Increasing social importance on sustainable issues is placing more pressure on firms to act in a sustainable way. Media, political, environmental and social pressure have caused firms to place corporate social responsibility at the fore front of their strategy. DBS Holdings group Ltd.’s raised $1.6 billion last week from new sustainable investment products. The Chief Investment Officer reiterated that demand for ESG and sustainable products will continue to rise due to “structural changes in global demographics and the trend toward digitalization,” Fook (CIO) also claimed this has become the “new normal” and ESG strategies have been outperforming traditional equities over the past year (Chanjaroen, 2021). Furthermore, companies took advantage of lower interest rates from investors if they incorporated ESG instruments as a fundamental aspect of their strategy. Moreover, ESG components have become integrated into senior management compensation and reward structures. Although incentives behind this can be questioned, there is no doubt that it will lead to more ESG mechanisms and sustainable growth. An example from the Royal Bank of Canada stated “Client satisfaction and strategic measures like climate change, employee satisfaction, and diversity and inclusion are part of the risk and strategic performance segment, which accounts for 30% of the short-term incentive program.” Additionally, National Bank claims ESG incorporation is a key “factor used to determine CEO pay” (Orland 2021).
ESG has showed the importance for the social aspect, with many firms focusing on diversity, inclusion and health and safety for workers. Standardisation has also become a key subject for ESG, with organisations such as the IFRS (International Financial Reporting Standards) proposing new measures and regulations, in particular, enforcing a global sustainability measure for financial corporations. Covid-19 has been a defining moment for this trend, however, the external pressure had been increasing from regulatory organisations pre-covid 19. In Bill Gates recent book ‘How to avoid a climate disaster,’ he argues that it will cost approximately $3.5 trillion annually for multiple to decades to achieve a complete energy transition to renewables which will be essential for perpetual environmental problems. Therefore, the trend for ESG investing provides an effective start point to reach this objective. The arguments for ESG as a ‘fad’ do not apply for this case. Investors and senior management around the world target these key areas to appease media, political, environmental, and social agents. The belief we have entered the ‘Plateau of Productivity’ on Gartner’s Hype curve do not stand, which I believe is an oversimplified viewpoint, ignoring the systemic transition of demand for ESG products
Oliver Custis
Figure 1.1 Invesco ETF https://www.bloomberg.com/news/articles/2021-03-16/dbs-private-bank-raises-1-2-billion-for-esg-barbell-products
Chanjaroen, 2021 https://www.bloomberg.com/opinion/articles/2021-03-18/clean-tech-investment-isn-t-just-a-bubble-this-time
Bill Gates – ‘How to avoid a Climate Disaster’ https://www.gatesnotes.com/Energy/My-new-climate-book-is-finally-here
Orland, 2021 https://www.bloomberg.com/news/articles/2021-03-18/ceo-pay-tied-to-esg-sets-canadian-banks-apart-from-the-crowd
Sustainability without the Boring Bits 