But is ESG a uniquely modern concept?\u00a0 Arguably, one can trace its roots back to the 1960s and 1970s when conscientious investors channeled the \u2018protest spirit\u2019 to shift their financial allegiance from the morally dubious to the socially beneficial.\u00a0 As such, many rerouted monies from industries supporting divisive regimes into projects such as affordable housing and healthcare facilities.<\/p>\n
The idea gained further traction in the 1980s when sociologist James S. Coleman argued for \u2018social capital\u2019 to become a valid measurement of value \u2013 a concept seized upon by contemporary environmental activists.\u00a0<\/p>\n
In the 1990s came the notion of the \u2018triple bottom line\u2019, tying social and environmental concerns to the more traditional financial yardstick of success.\u00a0 By the 2000s, the first environmental financial research group was established.\u00a0 This so-called \u2018virtuous circle\u2019 comprised City of London bankers, lawyers and NGOs, who demonstrated a link between financial performance and environmental\/social standards.<\/p>\n
The orthodox view that return on investment (ROI) and philanthropy were incompatible was at last beginning to recede, and in 2011 a list of the hundred best companies to work for published in the Journal of Financial Economics<\/em> showed stock returns more than 2% better than their rivals.[1]<\/a><\/p>\n As awareness and concern around climate change increased rapidly throughout the 2000s, \u2018people power\u2019 gave new energy to the once fringe view that business had a function beyond generating profits \u2013 and propelled environment-driven ESG up the financial priority agenda.<\/p>\n What we have witnessed over the past few years is an acceleration of that original, pure ideal: can one make money while simultaneously making the world a better place?<\/p>\n It is my firm belief that the answer is unequivocally \u2018yes\u2019. \u00a0But more meaningful than my personal opinion is the strength of the data that tells a similar story.<\/p>\n The ascendancy of ESG funding demonstrates how investors are increasingly aligning their goals with hot-button topics such as climate change<\/a>.<\/p>\n Even in a COVID-blighted 2020, ESG investments have rallied globally, despite widespread market turmoil[2]<\/a>.\u00a0 Banking colossus Goldman Sachs has taken note, telling clients that \u201cprior to this crisis there was a meaningful and increasing focus on ESG investing and it is likely that this focus will only increase following coronavirus.\u201d[3]<\/strong><\/a><\/em><\/p>\n The Financial Times<\/em> tips ESG funds in Europe to treble in scale between now and 2025, reaching \u20ac7.6 trillion over the next five years, accounting for more than half of the European fund sector.[4]<\/a>\u00a0 It\u2019s big business, and the word is spreading fast.\u00a0<\/p>\n A Morgan Stanley survey showed four out of five asset owners were now factoring ESG considerations into their investment choices[5]<\/a>, while a poll from KPMG revealed more than a third of top company executives were increasing their focus on ESG due to investor concerns.[6]<\/a><\/p>\n For green investment in particular, ESG is a true game changer.<\/p>\n At its most basic level, the rising focus on ESG will compel businesses to be more open about their environmental impact.\u00a0 More importantly however, investment translates into infrastructure, talent<\/em> and research<\/em>.\u00a0 Logically, ESG will therefore dictate which businesses are destined to flourish amid a transformative influx of funds.<\/p>\n With technology trumping heavy industry in the eyes of ESG investors, for instance, we can begin to forecast which sectors are primed to soar in the coming decades.<\/p>\n With the world braced for radical climate change (a temperature rise of at least 2.5\u02daC is predicted for this Century[7]<\/a>) it is the E in ESG \u2013 the Environment<\/em> \u2013 which will likely fuel the ESG investment surge in years ahead.\u00a0 Whether it will save us from our hubris remains unknown. \u00a0Its impact on the market is more quantifiable.<\/p>\n A more habitable environment is essential for a prosperous world and has long-term ramifications, as I discussed in a previous Spotlight article<\/a>.\u00a0 Accordingly, investments with a green bias inspire long-term confidence \u2013 a potential \u2018holy grail\u2019 in any portfolio unevenly weighted towards short-term results.<\/p>\n A seven-year study by Barclays showed portfolios with a high ESG component consistently outperformed those with a low ESG component.\u00a0 The combined environmental, social and governance performance boost averaged 0.36%, or 0.27% for environmental criteria alone.[8]<\/a><\/p>\n Ample demonstration, according to the report, that \u201cincorporating an ESG tilt in an investment-grade credit portfolio is not detrimental to returns but can be beneficial\u201d.<\/em>\u00a0 Higher ESG ratings also tally with stronger credit ratings.<\/p>\n In investment circles, \u2018knowledge is power\u2019.\u00a0 US finance giant MSCI argues that ESG factors are increasingly important in identifying better managed companies, while raising red flags over those likely to face headwinds due to environmental decline.<\/p>\n Performance, predictability and confidence are powerful motivators for investors, and high ESG profiles can be a hallmark of all three.\u00a0 In a risk-based game, it\u2019s no wonder ESG is the buzz-phrase about town.<\/p>\n The energy market is especially sensitive to trends in environmental investment.\u00a0 Indeed, the International Energy Agency (IEA) points to a record slump in global energy investment during the pandemic of 2020.\u00a0 Yet the headline figure \u2013 an 18% fall in capital expenditure across the energy sector[9]<\/a> \u2013 conceals further promise for ESG investment, with smaller contractions (and greater resilience) in renewable power<\/a>, such as wind and solar<\/a>.<\/p>\n While power generation investment was estimated to dip 7% overall in 2020, annual spending on renewable power was down only 3% year-on-year, sustained by projects with long lead times such as offshore wind and hydropower.<\/p>\n Investments in oil and gas supplies declined by a third during the same period, driven by cuts of around 45% in shale companies in the United States, beset by bankruptcies and layoffs.\u00a0 Unsurprisingly, oil and gas companies are swiftly diversifying, which usually means investing in low carbon technologies. \u00a0<\/p>\n The IEA notes financial commitments have clustered around renewable power, with US$ 3.5 billion of final investment decisions (FIDs) taken by oil and gas companies in 2020, two-thirds higher than their capital spend outside of core areas in 2019.<\/p>\n Shrewd investors have an instinct for spotting where the momentum lies.\u00a0 With the world gradually \u2013 and unstoppably \u2013 turning greener, the environmental elements of an ESG portfolio begin to look more enticing by the year.<\/p>\n Nor is it only about changing institutional investing patterns. \u00a0Private businesses \u2013 like Abdul Latif Jameel<\/a> \u2013 can help to catalyze both business and government investment into solutions to combat climate change and accelerate a green recovery.\u00a0 Organizations like the Clean, Renewable and Environmental Opportunities Syndicate (CREO Syndicate<\/a>), of which Abdul Latif Jameel is a member, are already helping to change attitudes and explore private investment opportunities across the global ESG marketplace.<\/p>\n As the CREO explains in a white paper, \u201cOverall interest in sustainable investing is growing as many institutional investors and wealth owners re-evaluate their exposure to fossil fuels and as political discourse on climate risks builds.\u201d[10]<\/strong><\/a><\/em><\/p>\n Even if ESG concerns are heartfelt among employees and investors, for businesses it is the bottom line that makes the difference between sinking and swimming.<\/p>\n Management consultancy McKinsey has identified five key ways in which ESG investment can become \u201cmuch more than a fad or a feel-good exercise\u201d.[11]<\/a><\/p>\n \u201cForesight flows to the bottom line,\u201d McKinsey asserts, using the example of China\u2019s ongoing fight against air pollution.\u00a0 That nationwide endeavor is expected to generate some US$ 3 trillion in investment opportunities between now and 2030 across industries as diverse as indoor air purification and cement mixing.<\/p>\n Of course, successfully designing an ESG strategy can be easier said than done for many businesses. \u00a0<\/p>\n McKinsey advises focusing on a limited number of environmental goals to avoid competing projects working at cross purpose, and planning for potential short-term hits to operating profits.\u00a0 It also recommends tailoring any pitch to investors to emphasize \u2018value\u2019<\/strong> rather than \u2018saving the planet\u2019<\/strong>.<\/p>\n Financial and communication nuances aside, other roadblocks might threaten the smooth adoption of ESG principles.\u00a0 Businesses can, depending on jurisdiction, face a legal obligation to maximize shareholder wealth above all other considerations.[12]<\/a>\u00a0 Such cases have shown how delicate the tension can be between a community<\/em> and a commercial<\/em> ethos \u2013 or more pointedly, between the public good and private enrichment.<\/p>\n If ESG is still a work-in-progress from an individual business perspective, challenges also remain from an investor standpoint.<\/p>\n The case for ESG investment appears inarguable from the evidence in hand, yet projections are only as reliable as the data upon which they are built.<\/p>\n The ESG financial ecosystem is still evolving, which puts pressure on issuers and investors when it comes to disclosing information.\u00a0 While progress has been made by several key players in standardizing ESG practices, there remains a diverse array of terminology and disclosure frameworks.[13]<\/a>\u00a0 Such inconsistencies can deprive investors of dependable comparability measures.<\/p>\n Yes, ESG methodologies are improving and becoming more transparent, but scoring systems remain in transition, with ratings providers still refining their practices to unify key indicators, metrics and qualitative judgments.<\/p>\n The OECD highlights several steps necessary before investors can realize full value from ESG opportunities:[14]<\/a><\/p>\n The European Commission is aiming to make comparable standards mandatory via its new Sustainable Finance Disclosure Regulation (SFDR) legislation, which came into force in March 2021. \u00a0The laws are designed to increase transparency while discouraging \u2018greenwashing\u2019 \u2013 in other words, false claims of green credentials.<\/p>\n The new rules specify disclosure in several key areas: sustainability risks (including depreciation risks due to environmental or social events); investment in activities that contribute to environmental or social objectives; and the potential for adverse impacts on other ESG matters (including human rights, anti-corruption and anti-bribery.) \u00a0The UK is expected to follow suit in due course with its own version of the SFDR legislation.[15]<\/a><\/p>\n As data becomes more dependable, true value will be unlocked via improved analysis.<\/p>\n If investors wish to discover precisely where their money is going and what impact it is having on the wider world, they can increasingly turn to data-driven market research. \u00a0Organizations such as financial intelligence firm S&P Global use versatile data platforms to produce \u2018normalized ESG benchmarks\u2019<\/em>. \u00a0Such specialist insights aim to inform investors at-a-glance whether a business\u2019s ESG policy is worth the (hopefully recycled) paper it is printed on.<\/p>\n S&P\u2019s Global ESG Scores system claims coverage of more than 7,300 companies, representing 95% of global market capitalization. \u00a0It draws on more than 1,000 data points and 100 questions to derive 23 separate criteria scores and an overall weighted rating.\u00a0 \u00a0A priceless tool for investors intent on making sustainability a core principle of their portfolios.<\/p>\n Armed with such validity, where might socially aware investors seek to invest their finances? \u00a0Increasingly, the answer lies in climate bonds.<\/p>\n Reliable, measurable and transparent: climate bonds represent another step in the right direction for green funding. But what exactly are climate bonds and how can they help shape perceptions and power new investments?<\/p>\n Think of climate bonds as fixed-income financial guarantees promoting the funding of environmental projects worldwide.\u00a0 Or, a way for investors to bet on all our futures, with confidence.<\/p>\n Such bonds can subsidize a range of climate change mitigation schemes: from enabling homeowners to equip their properties with solar panels, to capturing greenhouse gas emissions, helping coral reefs adapt to warmer waters, or building river delta flood defenses.<\/p>\n Certified bonds can be issued by thousands of bodies globally, from states and banks, to businesses and local governments.\u00a0 And they\u2019re growing rapidly, from US$ 70 billion issued in 2016 to US$ 255 billion in 2019.[16]<\/a><\/p>\n The range of projects securing climate bond funding is widening by the day, ultimately limited only by people\u2019s imagination and enthusiasm.<\/p>\n The London-based Climate Bonds Initiative<\/a> was the world\u2019s first climate bond certification program, and has since been used as a model for other countries to design their own green bond listing bodies.<\/p>\n At Abdul Latif Jameel, we have seized on the vast potential of climate bonds to expand our program of clean energy projects, principally through FRV<\/a>, a leading global developer of renewable utility-scale projects and part of Abdul Latif Jameel Energy<\/a>.\u00a0<\/p>\n FRV has a presence on five continents and has developed over 50 renewable energy<\/a> plants.\u00a0 It has a global project portfolio in markets including Australia, Europe, and Latin America; and over US$ 3.5 billion in total financing managed with some of the leading banks and financial institutions.\u00a0 Over 15 years, FRV has been putting ESG principles into practice, engaging with communities and providing higher education scholarships to promising local students. \u00a0FRV has a strong track record at the forefront of renewable energy solutions with a development experience of over 5GW including assets currently under development, and plans to invest over US$ 1.5 billion in fixed assets to double their total installed capacity, from 2 GW in 2020 to 4 GW by 2024<\/p>\n In September 2020, it took its ESG activities a stage further when it partnered on the first ever Climate Bond Certified green transaction in Spanish history, securing \u20ac64 million financing for its San Serv\u00e1n solar plant<\/a> in Extremadura.<\/p>\n The photovoltaic plant will become operational in 2022, generating 291 GWh of clean energy each year, enough to offset 216,000 tons of CO2<\/sub> annually and power more than 100,000 homes.\u00a0 Investment bank Natixis was underwriter for the deal.\u00a0 ESG rating and research agency Vigeo Eiris provided verification against the solar criteria of the Climate Bond Standard, ensuring it aligns with the 2\u02daC warming limit, outlined in the Paris Agreement.<\/p>\n A few weeks after the San Serv\u00e1n deal, FRV secured its second climate bonds deal, for the 90 MWac Sebastopol Solar Farm<\/a> in New South Wales, Australia \u2013 one of the first renewable energy financing deals of its type in the country. \u00a0The Sebastopol project, FRV\u2019s seventh solar farm in Australia, is funded by ING in compliance with the Loan Market Association (LMA) Green Loan Principles and the Green Projects requirements.<\/p>\n With San Serv\u00e1n and Sebastopol as templates, it is clear climate bonds will play a central role in unlocking ESG\u2019s near-limitless potential.<\/p>\n Most recently, the US-based tech giant, Amazon announced<\/a> its global commitment to The Climate Change Pledge<\/a>, becoming the world\u2019s largest renewable energy purchaser.\u00a0 The announcement also heralded Europe\u2019s largest ever Power Purchase Agreement (PPA), and in FRV\u2019s Spanish home market, we are proud to continue FRV\u2019s pioneering heritage by being part of this with plants located between Extremadura and Andalucia Regions.\u00a0 FRV\u2019s long held vision of driving the transition to a more sustainable energy future is a perfectly synergy with Amazon\u2019s pledge to be net zero carbon by 2040, making Amazon\u2019s decision to collaborate with an experienced independent power produce in their Spanish home market a natural choice.<\/p>\n Only the boldest of prophets would claim ESG will transform the global investment market overnight. \u00a0Rather, its steady rise in profile over the past few years heralds an evolution of mindset.\u00a0 It signifies a newfound recognition of the potential of ethical investment to tackle the most pressing issue of our time: saving the environment.<\/p>\n If ESG is still in low-gear, or even feeling a post-COVID drag, be not dissuaded.\u00a0 Its influence will only expand as regulatory and reporting methods achieve global standardization.\u00a0 Why?\u00a0 Because ESG provides a measure of how money can serve a good beyond merely generating more of itself. \u00a0<\/p>\n It provides a tool for businesses to differentiate themselves from their rivals and secure make or-break funds.\u00a0 Winning investment in today\u2019s climate-conscious world increasingly means mirroring the concerns of investors.\u00a0 That means businesses not only reducing their carbon footprint but also increasing their transparency on environmental performance.\u00a0 Not only being green but being seen<\/em> to be more<\/em> green.<\/p>\n From an investor perspective, meanwhile, ESG is a pathway by which money can be directed to reflect the concerns of a more socially aware population.\u00a0 With ESG-weighted investments outperforming the alternatives, more money will naturally follow. In the world of commerce, success breeds success.\u00a0 And in this respect, the pressure for transparency and regulation is most definitely \u2018on.\u00a0 The US Securities and Exchange Commission\u2019s Acting Chair, Allison Herren Lee recently stated how \u201cThe staff of the SEC plays a critically important role in ensuring compliance with disclosure obligations, including those that implicate climate risk, through its review of public company filings and its engagement with issuers. \u00a0The perspective the staff brings to bear is invaluable in helping to ensure that issuers comply with their obligations and that investors receive the information they need to properly inform their investment decisions\u201d.<\/em><\/p>\n If governments are somewhat limited to being merely reactive<\/em>, the critical role that can be played private sector capital has the inherent capacity to be positively preemptive.<\/p>\n Together we can encourage big business and governments to \u2018do the right thing\u2019 and, in doing so, drive our society towards a greener, more sustainable future.<\/p>\n <\/p>\n [1]<\/a> https:\/\/papers.ssrn.com\/sol3\/papers.cfm?abstract_id=985735<\/p>\n [2]<\/a> https:\/\/www.cnbc.com\/2020\/06\/07\/sustainable-investing-is-set-to-surge-in-the-wake-of-the-coronavirus-pandemic.html<\/p>\n [3]<\/a> https:\/\/www.thetimes.co.uk\/money-mentor\/guide\/guide-to-ethical-investing\/<\/p>\n [4]<\/a> https:\/\/www.ft.com\/content\/5cd6e923-81e0-4557-8cff-a02fb5e01d42<\/p>\n [5]<\/a> https:\/\/www.morganstanley.com\/press-releases\/morgan-stanley-sustainable-signals–asset-owners-see-sustainabil<\/p>\n [6]<\/a> https:\/\/assets.kpmg\/content\/dam\/kpmg\/be\/pdf\/2018\/05\/esg-risk-and-return.pdf<\/p>\n [7]<\/a> https:\/\/climate.nasa.gov\/effects\/<\/p>\n [8]<\/a> https:\/\/www.investmentbank.barclays.com\/our-insights\/esg-sustainable-investing-and-bond-returns.html?trid=%5b%25tp_AdID%25%5d&cid=disp_sc01e00v00m04GLpa11pv29#tab3<\/p>\n [9]<\/a> https:\/\/www.iea.org\/articles\/investment-estimates-for-2020-continue-to-point-to-a-record-slump-in-spending<\/p>\n [10]<\/a> https:\/\/creosyndicate.org\/news-collection\/pathwaystoinvesting<\/p>\n [11]<\/a> https:\/\/www.mckinsey.com\/~\/media\/McKinsey\/Business%20Functions\/Strategy%20and%20Corporate%20Finance\/Our%20Insights\/Five%20ways%20that%20ESG%20creates%20value\/Five-ways-that-ESG-creates-value.pdf?shouldIndex=false<\/p>\n [12]<\/a> https:\/\/www.forbes.com\/sites\/csr\/2010\/09\/21\/what-ebays-court-fight-with-craigslist-reveals\/<\/p>\n [13]<\/a> https:\/\/www.oecd.org\/finance\/ESG-Investing-Practices-Progress-Challenges.pdf<\/p>\n [14]<\/a> https:\/\/www.oecd.org\/finance\/ESG-Investing-Practices-Progress-Challenges.pdf<\/p>\nAn environment worth trillions<\/h2>\n
![\"\"](\"https:\/\/www.alj.com\/app\/uploads\/2021\/06\/ALJ-Green-Investing-ESG-Funds-scaled.jpg\")
<\/p>\n![\"\"](\"https:\/\/www.alj.com\/app\/uploads\/2021\/06\/ALJ-Green-Investing-Growth-scaled.jpg\")
<\/p>\nHow ESG energizes ROI<\/h2>\n
![\"Green](\"https:\/\/www.alj.com\/app\/uploads\/2021\/06\/ALJ-Green-Investing-Portfolios-scaled.jpg\")
<\/p>\n![\"Green](\"https:\/\/www.alj.com\/app\/uploads\/2021\/06\/ALJ-Green-Investing-Sectors-scaled.jpg\")
<\/p>\nWhy ESG is a winning formula<\/h2>\n
\n
Inconsistency impeding full potential<\/h2>\n
![\"Green](\"https:\/\/www.alj.com\/app\/uploads\/2021\/06\/ALJ-Green-Investing-Ecosystem-scaled.jpg\")
<\/p>\n\n
![\"Green](\"https:\/\/www.alj.com\/app\/uploads\/2021\/06\/ALJ-Green-Investing-Global-Scores-scaled.jpg\")
<\/p>\nClimate bonds offer stamp of authenticity<\/h2>\n
![\"Green](\"https:\/\/www.alj.com\/app\/uploads\/2021\/06\/ALJ-Green-Investing-Taxonomy-scaled.jpg\")
<\/p>\nAn environment rich in rewards<\/h2>\n