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Opinion

ESG: An important key to the future

Roger H. Hartmann, Member of the Scientific Committee of Label R
April 4, 2018, 10:50 p.m.

Word count: 854

Environmental Social Governance (ESG) awareness must be spread through all industries, business sectors, and geographical regions if we are to achieve better qualitative development in those emerging markets that need it most. For Africa in particular, scrutinizing business activities for ethical behavior is particularly important, given the sensitive history of this region rich in natural resources. But in Africa and around the world, there is little doubt that the growing importance of ESG is a powerful and even irreversible trend. 

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Environmental Social Governance (ESG) awareness must be spread through all industries, business sectors, and geographical regions if we are to achieve better qualitative development in those emerging markets that need it most. For Africa in particular, scrutinizing business activities for ethical behavior is particularly important, given the sensitive history of this region rich in natural resources. But in Africa and around the world, there is little doubt that the growing importance of ESG is a powerful and even irreversible trend. 

There are increasing cases in which large companies not only negatively impact their own operations and interests, but even exacerbate local conflicts and instability. This can occur even with the best intentions. 

Take for example, the experience of the French Construction giant LaFarge Hoclim in Syria; which sought to continue its operations and protect its employees, but subsequently financed the Islamic State terror group in doing so. Needless to say, the failure to navigate such ambiguities can create reputational, operational and financial risks for both companies and investors. 

If companies and investors can first identify and master their understanding of ESG, they can take real steps to address the many complex risk associated with noncompliance of these principles, such as:

- Mitigate the risks and negative impact posed to and/or by their operations;
- Ensure long-term financial performance of their business;
- Secure their reputation by awarding best practices;
- And play an important role in supporting peace and development in sensitive regions.

It’s a no-brainer that negative ESG events can impact the company’s balance sheet and even trigger divestment. For example, the Government Pension Fund of Norway divested from ZTE for its corrupt and unethical behavior in countries such as The Philippines, Myanmar, Nigeria, Liberia and Papua New Guinea.

Given this high-profile failure, it must be asked if contemporary ESG policies are actually filtering past the files of corporate headquarters to have an impact on ground operations. In this sense – writing flashy policy is nice, but implementing what is written is what counts. 

Companies and funds, which do not accept and implement these fundamental principles are putting themselves at serious risk of antagonizing their stakeholders and will most likely see large penalties imposed on them by investors, customers, suppliers and even by other companies as time goes on. 

In today’s world, the external pressure on companies and funds to adopt ethical and ESG standards in their daily operations and investment is increasing. 

As a consequence, asset owners representing beneficiaries are under both regulatory and popular customer pressure to promote and align investments with the wider interests of the beneficiaries.

Governance principles checks have been on the agenda for many years already. Since the start of the new millennium, screening for socially responsible investments according to ESG criteria has marked a clear shift toward active measures in the direction of risk management, integration, and corporate citizenship.  

Further still, companies are now aware that proving their aspirations for sustainability is now an integral part of the fund-raising process. 

The same can be said for ensuring business continuity, with a number of market trends, as for example climate change, which could disturb business models within the management’s own lifetime. 

The trends are all pointing toward the fact that more and more investors are selecting responsible investment strategies. And at the same time, asset managers are providing additional disclosure on their stewardship and ESG activities. 

Globally, socially responsible investments grew by 25% over the last two years, reaching $23trn. And we already know that ESG-driven investing is going to double in size over the next two years. 

Institutional Investors can see that ESG enriches the overall risk measurement and management process. And then, at the beneficiary or retail level, attitudes and behaviors have deeply changed, with the next generation of consumers increasingly concerned about environmental impact and equality. 

Despite an absence of common and globally-accepted definition, ESG standards in strategies tend to outperform those which don’t by a significant margin. Data suggests that taking a long-term view on responsible investing is at least as much about limiting downside risks and benefiting from upside potential. 

Geopolitical risk is a good example where ESG factors blur with conventional investment factors. Let us not forget that the risk of corruption, still important in Africa, is included in the ESG factors. In fact, taking into consideration ESG data is enriching the global data environment, and may bring an important value which is not yet priced into the market. 

In conclusion, it is obvious that ESG factors are no longer second-class considerations. In the world of investment, we must consider everything which is related to environmental, social and governance issues. And this naturally relates and even overlaps with other more traditional issues, like corporate culture, geopolitics and regulatory issues. This comes from the increasing popular interest for customers, increasing pressure from the regulators, and the various global initiatives, say for example, the United Nations Principles for responsible investments. A global ESG certification is in this sense a perfect and timely answer to these new trends. 
 

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