The European green deal is being extended to the finance world. The European Union is examining how to make sustainability considerations an integral part of its financial policy. The aim is to incentivise private investment in the transition to a climate-neutral economy.

Holistically, the EU is tackling this from different angles. It has created a taxonomy for sustainable activities which basically creates an EU-wide classification system for these activities. It is also creating an EU-wide green bond standard to encourage market participants to issue and invest in EU green bonds and improve the effectiveness and credibility of the market. The European Commission is also issuing guidance for companies on how to report on their business activities’ impact on the climate. Finally, they’re encouraging companies to implement ‘ESG’.

ESG stands for Environmental, Social, and Governance. ESG is not CSR (Corporate Social Responsibility). CSR is more about providing accountability within your organisation while ESG aims to collect and measure metrics relevant to your business objectives and your stakeholders.

ESG is gaining a lot of traction. Asset managers are actively looking for companies, projects and investments with a proven ESG profile. ESG investing is sometimes referred to as sustainable investing, responsible investing, impact investing, or socially responsible investing. In essence, it is a form of socially responsible investing that prioritises financial returns alongside a company’s impact on the environment, its stakeholders and the planet. Investors are increasingly applying these non-financial ESG factors as part of their process to identify material risks and growth opportunities to guide their investment choices.

But how does one actually implement ESG in their business so that they can make their business more appealing to socially conscious investors? In general, this is what an investor looking for a sustainable investment would look at:

Environmental criteria: This is about how a company performs with respect to nature. For example, a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks. For example, are there issues related to its ownership of contaminated land, its disposal of hazardous waste, its management of toxic emissions, or its compliance with government environmental regulations?

Social criteria: This would involve looking into how a company manages relationships with employees, suppliers, customers, and the communities where it operates. Social criteria look at the company’s business relationships. Does it work with suppliers that hold the same values as it claims to hold? Does the company donate a percentage of its profits to the local community or encourage employees to perform volunteer work there? Do the company’s working conditions show high regard for its employees’ health and safety? Are other stakeholders’ interests taken into account?

Asset managers are actively looking for companies, projects, and investments with a proven ESG profile

Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights. With regard to governance, investors may want to know that a company uses accurate and transparent accounting methods and that stockholders are given an opportunity to vote on important issues. They may also want assurances that companies avoid conflicts of interest in their choice of board members, don’t use political contributions to obtain unduly favorable treatment and, of course, don’t engage in illegal practices.

Why is ESG so important today

Firstly, ESG criteria are an increasingly popular way for investors to evaluate companies in which they might want to invest. Secondly, many mutual funds, brokerage firms and robo-advisors now offer products that employ ESG criteria. Finally, ESG criteria can also help investors avoid companies that might pose a greater financial risk due to their environmental or other practices. It is not uncommon that an asset management company today would exclude investments in companies with major recent or ongoing controversies related to workplace discrimination, corporate governance, and animal welfare, among other issues.

Today, investors increasingly acknowledge that by following ESG criteria, they may be able to avoid companies whose practices could signal a risk factor and avoid facing situations such as BP’s 2010 oil spill and Volkswagen’s emissions scandal, both of which rocked the companies’ stock prices and resulted in billions of dollars in associated losses.

It is now evident that ESG-minded business practices are gaining traction and, as a result, investment firms are increasingly tracking their performance.

In Malta specifically, the minister for energy, enterprise and sustainable development has publicly announced that she will prioritise sustainable investment by Maltese companies and support the flow of capital to those companies which embed ESG initiatives at the core of their business models. In addition, a draft Social Enterprise Act is being discussed in parliament to provide the legal framework to enable the development of sustainable social enterprise organisations.

Germany has gone a step further with a bold move adopting a Supply Chain Act which makes it binding on companies to carry out environmental and social due diligence exercises together with a comprehensive risk analysis to identify any risk of violations of environmental obligation or human rights. It also imposes an obligation on companies in Germany to ensure their direct suppliers implement predefined social standards such as suitable working conditions, and health and safety requirements.

If you have a company or a business, it may be well worth your time to have a look at your internal policies to see if you can implement ESG criteria better, as these will not only make you feel that you are doing your part for climate change but will also make your venture much more lucrative financially.

Gayle Kimberley, director, Ewropa Consultancy

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