ESG: It’s not a Question of if or When, But How?
It is no secret that environmental protection, once a fringe topic discussed by a handful of activists and academics, has become a mainstream concern around climate change, a topic that is currently dominating global and contemporary dialogue.
Greta Thunberg and Extinction Rebellion are products of this ongoing societal paradigm shift. Within the financial industry however, companies and investors are still coming to terms with the consequences of this shift, and what it means for them. While there is a lot of literature around “climate change”, the focus is not only on being ‘green’ but also on the social impacts of business and on good governance hence the now infamous acronym ESG. For a more detailed look at the rise of ESG in the asset management space, read our blog Dissecting ESG: Ethics and Profitability.
While ESG has always existed on the periphery of traditional finance, it has now moved from being a niche and conviction-based concept to a core component of financial decision-making. Major investors such as State Street and Legal & General have taken steps to not just reduce exposure to perceived ESG ‘violators’, but also to potentially leverage their shareholder power to push companies to pursue more ESG-friendly mandates.
It is becoming increasingly clear that ESG-driven business models have financial benefits. Research by FT Adviser shows that ESG funds have around £124 million in inflows per week. Morningstar reported that nearly $4.4 billion has been invested in ESG in 2019, with 70% of inflows heading into active funds. Society has shown a willingness to both reward companies that demonstrate the wider benefit of their activities across the spectrum of stakeholders and to punish those who do not. Read the ESG Factors Driving Change in Asset Management 2019 outlook whitepaper.
The big question is not if or when ESG becomes a core component of business, but how. The relatively qualitative nature of existing ESG standards makes it difficult for companies to engage in rigorous self-reflection and self-improvement, as they do not have a set of universally recognised ESG guidelines upon which to model themselves. On the other side, investors do not have a unitary set of ESG standards through which to assess companies. Both parties therefore must rely on their own perspectives on ESG to make decisions. This disjointed approach benefits no one and may in fact discourage ESG integration into business due to the possibility of companies being accused of ‘greenwashing’ if their actions are misunderstood, or if their efforts are not aligned with public expectations.
Apex launched its GreenLight ESG product earlier in the year as a direct response to overcoming this hurdle through the creation of an ESG scoring criteria. Similar to the way a credit score reflects financial ‘health’, an ESG score will reflect a company’s ESG ‘health’. A ‘healthy’ company would have to comply with a wide range of ESG criteria. While there have been attempts in the past to create such a framework, it has been largely limited to the public market and publicly-traded companies. This is in part due to private market participants having comparatively opaque ESG profiles compared with private markets, a consequence of the limited nature of mandatory reporting requirements.
Our broad range of service solutions ranging across the full financial services ecosystem, teamed with a long history of servicing privately held companies, means we are well-placed to tackle this challenge and develop a benchmark and ESG framework for the private market. Our vision is to utilise this framework to pave the way for all types of companies, across all industries, to understand and accurately assess their ESG contribution.
Apex was founded with a very clear objective – to work locally alongside clients to provide a fast, effective and locally tailored service. Strong client relationships have been, and always will be, at the heart of the Apex philosophy. The commitment to staying true to this goal has played a huge part in our ability to expand our solution set and the ability to deliver advice on sustainable and ethical investments across the world adds further value to our clients as they grow.