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Back to HomeSustainability – doing well while doing good
In a bid to improve business practices, Environmental, Social and Governance (ESG) factors have become an important long-term trend that will also shape sustainable investment themes and processes.
In a bid to improve business practices, Environmental, Social and Governance (ESG) factors have become an important long-term trend that will also shape sustainable investment themes and processes.
A company’s desire to “do good” for society no longer has to come at the expense of profit. Amid efforts by organisations in all sectors to act and behave sustainably (Figure M3) in line with public opinion, they can now do so while still remaining profitable.
Figure M3. ESG covers a wide range of aspects where sustainability is increasingly important
- Climate change and carbon emissions
- Air and water pollution
- Biodiversity
- Deforestation
- Energy efficiency
- Waste management
- Water scarcity
- Customer satisfaction
- Data protection and privacy
- Gender and diversity
- Employee engagement
- Community relations
- Human rights
- Labor standards
- Board composition
- Audit committee structure
- Bribery and corruption
- Executive compensation
- Lobbying
- Political contributions
- Whistleblower schemes
Source: CFA Institute
In particular, heightened expectations of consumers and shareholders are creating pressures that drive higher ESG standards. Companies that embrace this approach stand to gain from greater social standing and more sustainable revenue streams.
These dynamics are here to stay because of several complementary reasons. Firstly, it makes good business sense to incorporate sustainability into business practices. Reducing resource wastage in manufacturing or services creates cost savings and thus improves profitability. Such companies also tend to emphasise customer and staff satisfaction, resulting in greater customer and worker loyalty that helps to drive their growth.
Secondly, governments around the world are increasingly introducing legislation to combat climate change. ESG-compliant companies will have an advantage over companies lagging in this aspect, and will likely face lower reputational and financial risks or penalties by avoiding ESG-related violations.
Thirdly, greater demand by investors for ESG considerations has accelerated green initiatives. For example, the circular economy ensures products are designed to be durable, repairable, reusable and recyclable. Electricity grids are also decentralising towards a distributed, web-like grid to connect multiple sources of renewable energy to various users, thereby providing for more alternative power sources in case one or more fails, whilst reducing pollution (Figure M4).
Figure M4. Renewable energy requires a more web-like power grid, which provides more redundancies in the event of a failure in part of the grid.
Source: Allianz Global Investors, January 2020
Finally, the Sustainability sector is a job creator. The transition to a greener economy requires new skills for both existing and newly-created jobs. For example, renewable energy is expected to increase the total Energy sector employment from 58 million today to 100 million by 2050 2 , while every USD 1 million investment in ecosystem restoration projects created 31.5 jobs directly and indirectly 3 .
Ultimately, there is a compelling case for ESG investing as we highlight via our Sustainability Megatrend call.
2 OECD, International Renewable Energy Agency (IRENA), October 2020
3 OECD, February 2016
