Race for investment dollars belongs to environment-conscious firms

The increasing scrutiny by investors and multilateral organisations on a company’s environmental, social and governance risks before making investment decisions could reshape the global investment landscape, leaving behind companies that refuse to change, analysis shows.

Current trends suggest that a company’s environmental, social and governance (ESG) record as well as sustainability initiatives will play a critical role in whether it gets investments, secures government approvals and licences or even engages in international business.

In corporate speak, ESG is a term that denotes a stakeholder-centric approach to doing business. Under the environment, a company commits that its operations would not harm the environment, would be socially responsible, for example, in the use of customer’s data and uphold corporate governance principles including ensuring gender equality.

Some of the world’s biggest financiers and lenders say ESG now plays a critical role in their decision to spend investment dollars with many singling out environmentally conscious companies as deserving of their investment.

“ESG principles inform the way we run our firm, approach investing and partner with the assets in our portfolio,” said the world’s largest private equity firm, Blackstone, in its 2021 ESG report.

These private equity firms that largely source capital from institutional investors, such as pension funds, endowments and sovereign wealth funds are increasingly being pressured to fund environmentally responsible companies.

Even pan-African multilateral development organisation, the African Finance Corporation, has also said it “ensures that it carries out its lending, investment and advisory services to its clients and counterparties in a manner that is not negatively impactful on the environment and which ensures sustainable development.”

A recent survey by a leading professional services firm, PwC Nigeria, found that investors are paying keener attention to ESG risks and opportunities facing companies they invest in and are ready to take action.

The survey sought the views of 325 investment professionals from 43 territories. 53 percent were asset managers and 34 percent were analysts, and they had a combined $11.6 trillion assets under management.

Nearly 80 percent of the respondents said ESG was an important factor in their investment decision making; almost 70 percent thought ESG factors should figure into executive compensation targets, and about 50 percent expressed willingness to divest from companies that did not take sufficient action on ESG issues.

The results suggest that investors are torn between what they view as a responsibility to the planet and society and their fiduciary responsibilities to their clients.

While three-quarters of the investors surveyed said they thought it was worth sacrificing short-term profitability to address ESG issues, about the same number said they would be willing to accept only 1 percentage point or less of a haircut on their investment returns.

However, the reality is that pressure to factor climate and environmental concerns into investment decisions is building globally and could become a norm.

Already, several financiers have indicated their unwillingness to lend to oil and gas projects around the world. At the COP26 in Glasgow, 34 countries and four international finance institutions committed to ending financing for “unabated” fossil fuel projects in overseas countries by the end of 2022.

Campaigners are urging multilateral development banks including the World Bank Group, the African Development Bank, the European Bank for Reconstruction and others to stop funding fossil fuel projects.

Read also: ESG: Nigeria fails on the environmental, social and governance fronts

These campaigns are having some impact. Norway’s $1.4 trillion Sovereign Wealth Fund says it has exited hundreds of companies in the past few years because they were not compliant with ESG targets.

The European Union has proposed a rash of new laws to wean its economy off fossil fuels and could impose further tariffs that will impact businesses around the world including Africa.

One contentious proposal is the introduction of a border carbon adjustment tax that would impose tariffs on the greenhouse gas emissions associated with products imported from outside the European Union. In effect, this would protect European companies from goods made in countries with less stringent climate policies.

Some of the insights deduced from the PwC survey are that companies are better served if they embed ESG directly into their corporate strategy and investors are emphasising the importance of leadership from the top team, starting with the CEO to communicate clearly the ESG goals.

However, companies need not go overboard proving they are compliant by inundating “investors with reams of data just for the sake of more disclosure or to overreach and fall prey to “green-washing” critiques,” noted the PwC analysts.