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June, 2020 | VentureXchange
Sustainable investing in the new normal

Sustainable investing in the new normal

Sustainable investing is becoming part of business today as businesses face environmental and social challenges. Addressing these sustainable challenges in global markets allows for financial advisors and investors who are actively seeking places to invest their money that support their sustainable values.

Refinitiv provides a rich source of environmental, social and governance (ESG) research data, covering 80% of global market cap, spanning 76 countries. However, only 35% of companies have specific reduction targets around their emissions, meaning many are setting up policies without backing up their intentions.

Sustainable investing has become more important now more than ever. In the world of new normal, investors will look for their portfolio companies to integrate ESG objectives.

Why sustainable investing is growing?

 

The reason behind the high interest in sustainable investing starts with climate change that was most discussed theme this year in Davos. From a corporate and market perspective, that shows more opportunities for tech companies. Some of the companies that showed interest in green investing are Starbucks and Salesforce.

According to Barron’s, Salesforce.com announced it would plant a trillion trees over the next 10 years. Starbucks (SBUX) committed to a 50% reduction in emissions. That said, big companies are willing to speak loudly about climate risks in 2020. The fact that climate change was number on the topic at Davos, says a lot about how important this issue really is.

The climate solutions market could double from $1 trillion a year now to $2 trillion a year by 2025, says BofA’s Israel, including renewables, electric vehicles, batteries, biofuels, and circular economy plays.

Technology is changing what we demand and how we consume. Whether it’s driverless cars, smart metering in utilities, renewables in oil and gas, or online sales in retail, most sectors of the economy are seeing paradigm shifts in the way business is conducted.

Together these are the reasons why sustainable investing is rapidly growing. Therefore, sustainable investing has become more than a trend, it’s become the new normal.

In today’s environment where change and uncertainty seem to be the only constants, more and more investors are taking a long-term view and choosing to put their money into companies that generate a return and act responsibly. ESG investing is already reshaping global markets.

Key takeaways

 

To sum up, ESG investing is growing and it is becoming part of business today. In the recent article, we discussed the ESG legislation requirements.

Registered data on ESG investing growth showed a good path for sustainable investors and could serve as a proof point of how investors can trust ESG funds in turbulent markets.

There is no question about ESG becoming an integral part of doing business. If you are looking to integrate ESG criteria to your business strategy, we can advise you on devising the ESG strategy and communicating it to various stakeholders. 

Why ESG is core to a venture capital success?

Why ESG is core to a venture capital success?

Venture Capital (VC) is having a transformative impact on large sections of the global economy. While ESG issues have never been greater, investors may think the ESG is less relevant for VC. Tech companies do not directly emit many greenhouse gases or pollute many rivers after all. However, ESG integration for investing can be critical to long term success of venture capital firms.

The need for sustainable investments has grown dramatically in recent years and so has the pressure on investors to integrate sustainability factors in their investments. VC mostly targets disruptive business models that often don’t have developed model of ESG issues. As companies grow, individuals within the company will have their own perceptions of appropriate behaviour and activity which will likely be divergently resulting in a loss of ESG rigour in the corporate operation.

Moreover, tech companies are often at the forefront of emerging ESG concerns. For example, the ethical issue of personal data will become major 2020s human right issue.

That said, VC investors will have greater chances to identify ESG risks with systematically integrated ESG into investment decision making. Moreover, systematic approach is particularly valuable for VC investors because they have smaller teams and bigger portfolios than their private equity peers.

The adoption of environmental, social and governance policies can help mitigate risks and provide a healthy framework for inexperienced founders. Moreover, it can be less painful for the company if ESG has been part of its culture in its early stages rather than being ‘retro-fitted’ under the pressure of investor scrutiny.

With this in mind, VC investors can set the foundations for rapid growth if their company incorporates ESG early on. A clear ESG commitment can also attract Millenials, as sustainable consciousness consumers. A 2019 Morgan Stanley Institute for Sustainable Investing survey of high net worth investors found that 95% of millennials were interested in sustainable investing.

According to MSCI, the interest from millennial investors has already helped drive the rapid growth in ESG investment. Nearly USD 4 billion flowed into ESG funds in the first three quarters of 2019. The year-end total in 2018 was USD 5.5 billion, which at the time was a calendar-year record, but sustainable funds were on track to triple that during the waning months of 2019.

The necessity of ESG due diligence is simply relative to the sector, and so different factors will be diligenced depending on the profile of the business. Therefore, due diligence and manager research teams have been leveraging ESG data to better understand the ESG characteristics of managed products and funds. ESG reporting and data may help align what managers say they are doing with ESG outcomes.

For example, where a manager says they are building a portfolio designed to minimize exposure to climate change risk, due diligence and research teams may leverage ESG reporting to measure the carbon footprint and performance on climate change risk management of a portfolio and compare it to a benchmark.

At Venturexchange, we can advise clients in devising the ESG strategy and communicating it to various stakeholders. ESG strategy is not a stand-alone issue but should be integrated into the overall company’s strategy, operating environment, and business model.

Our article does not provide all the answers that involve ESG issues, but we hope it provides a framework for VC investors to consider and manage their ESG impact.

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ESG investing: Integration of sustainability risks

ESG investing: Integration of sustainability risks

Investing in sustainability is no longer a trend, the ESG considerations are becoming the norm. Growth of ESG investing in Europe became a focus for investment companies. Management companies have been typically concerned with assessing and monitoring the financial risks associated with the investments acquired by funds which they manage. However, from 10 March 2021 onwards, all management companies will be required to provide information on their websites about their policies on the integration of sustainability risks into the investment decision-making process.

During the pandemic, we experienced higher inflows from ESG investing strategies. Public scrutiny of how businesses are responding to the COVID-19 pandemic is bringing renewed attention to the importance of corporate transparency on sustainability issues.

 

ESG Legislation

 

ESG investing integration will require portfolio management teams and risk teams within management companies to assess how sustainability risks are integrated into the investment decision-making process. ESG investing decision will cover what is applicable to each fund under management and to update due diligence policies accordingly. Information on such policies must then be disclosed on the management company’s website.

Under the SDFR, all management companies (regardless of whether or not they manage ESG funds) will be required to revise their remuneration policy to explain how this policy is consistent with the integration of sustainability risks. Given the deadline of 10 March 2021 for disclosing this information on their websites, management companies should now conduct an assessment on how sustainability risks are integrated into remuneration structure.

Legislation and all the necessary information can be found on the Official journal. While legislative measures are about to take action, this is a clear indicator of how the European Commission is committed to sustainability.

According to recent research by Morningstar, over 10 years, the average annual return for a sustainable fund invested in large global companies has been 6.9% a year, while a traditionally invested fund has made 6.3% a year.
The Morningstar researchers noted that sustainable funds are longer-lasting than their peers.

 

Examples of ESG Investing Criteria

 

ESG examples are often interlinked, and it can be challenging to classify an ESG issue as only an environmental, social, or governance issue, as the table below shows.

Source: CFA Institute, illustration by Venturexchange

As more environmental, social and governance issues are arising, the modern investor will reevaluate traditional investment approaches.

 

The New Normal

 

Disclosures on ESG factors will become standardized and widespread by the end of the decade. According to Morningstar, funds that integrate environmental, social and/or governance (ESG) factors registered record growth in Q1 2020 that eclipsed the previous watershed moment in Q4 2019.

Registered data on ESG investing growth showed a good path for sustainable investors and could serve as a proof point of how investors can trust ESG funds in turbulent markets.

Within 36 months there will no longer be a perceptible distinction between sustainable and traditional investing. ESG investing transforms the way corporate sustainability is used by developing new disclosure expectations for material sustainability.

Growing research suggests that ESG factors have contributed to long-term financial performance. Therefore, incorporating Environmental, Social and Governance factors into decision-making frameworks is fundamental to managing new and emerging risks.

If you are looking for advice to incorporate ESG strategy and how to communicate it to various stakeholders, contact us. Our services include ESG due diligence, gathering sustainability and ESG key performance indicators (KPIs), industry benchmarking, identifying risks, proposing action plan, monitoring and reporting on performance.

Foreign Direct Investment flows

Foreign Direct Investment flows

During the time of COVID-19, Foreign Direct Investment flows are expected to fall by 30% in 2020. Despite the government support and policy measures to help against COVID-19 pandemic, FDI flows are expected to drop.

According to the latest report from OECD, FDI could play an important role in supporting economies during and after the crisis. The FDI help could include financial support to their affiliates, assisting governments in addressing the pandemic, and through linkages with local firms.

Public health measures have caused economic disruptions that impact the foreign direct investment decision of firms. We learned from the past crisis that small and medium-sized enterprises show greater resilience due to their linkages with the financial resources of their parent companies.

According to the OECD Investment Policy Response, FDI is expected to decline sharply as a consequence of the pandemic and the resulting supply disruptions, demand contractions, and pessimistic outlook of economic actors.

In addressing the medical supply shortage, governments should leverage investor networks and investment promotion agencies. Some governments have already embraced imports of essential good, while some businesses have started producing medical essentials such as medical masks etc.

Moving forward, cross-border partnerships and collaborations between companies can facilitate finding long-term business solutions, such as ways to resume production while protecting workers’ health.

FDI is expected to face major drops as the supply chains are facing disruption. Meanwhile, capital inflows will be impacted as companies put some mergers and acquisitions (M&As) on hold.

As an example of earning in 2020 of large MNEs are expected to fall. According to the latest statistics data gathered from Refinitiv, there will be large year-over-year drops in earnings in the energy, consumer discretionary sector, industrials, and materials sectors. On the other hand, it is expected that there will be year-over-year increases in earnings in the health care, technology, and communications sectors.

Source: OECD, from Refinitiv M&A database

The latest data from Refinitis M&A database shows a significant drop in completed M&A deals in the first quarter. However, there is no evidence on the deals withdrawn. That leads to the conclusion that investors are focused on closing deals rather than withholding from it. In the short term, equity capital flows will fall due to so many deals being put on hold, but it could mean that there will be an increase in the future as these deals are completed as the economy recovers.

To read the full report and in-dept insight into FDI investments, please visit the OECD official website.

ESG Investing – Why Now is the Right Time?

ESG Investing – Why Now is the Right Time?

Now is the right time to consider ESG investing, since the covid-19 has hit the world. Investors who can incorporate ESG, environmental, social and governance mandates into their investment portfolios will see the world embracing the goal of ESG.

Advisors’ use of funds focused on environmental, social and governance (ESG) factors is on the rise this year, with nearly four in 10 advisors (38%) indicating they’re currently using or recommending these funds in 2020. That’s up from 26% in 2018 and 2019, according to the 2020 Trends in Investing Survey by the Financial Planning Association, the Journal of Financial Planning and Janus Henderson. The survey found that nearly one-third (29%) of advisors plan to increase their use and recommendation of ESG funds over the next 12 months, up from 19% in 2019, and about 40% said that clients have asked about investing in such funds in the last six months.

According to Investment news latest article, ESG investing have emerged as the darlings of the financial markets since the start of the year. During the first quarter of the year, for example, when the S&P 500 Index was knocked off its decade-long bull market perch into bear market territory with a 23.7% decline, funds earning the highest ESG ratings by Morningstar averaged declines of 17.7%.

To align portfolios with a sustainable economic model, investors will look for low carbon volume to invest capital. Green energy think tankers report that doubling the share of renewables increases direct and indirect employment in the sector to 24.4 million by 2030. Renewable energy deployment affects the trade of energy-related equipment and services as well as of fossil fuels. Doubling the share of renewables in the global energy mix pays back in terms of economic growth, social welfare, job creation and overall trade balances.

Studies have already shown that the cost of capital is lower for companies that score well on Corporate Social Responsibility (CSR) metrics. That leads to the conclusion that companies who incorporate ESG investing communicate better with employees and have already secured more flexible and safe workplaces.

For the long term, ESG investing will lead companies for a better balance between near-term profits and long-term benefits for customers, employees, investors and the environment.

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