This article covers ESG, why ESG investing is trending, the factors in play, and why businesses need to control their economic footprint. The piece will cover Dubai Investment Fund as an example for ESG Investing to understand how values have moved today for the investors.
Values hold an important place in human life. While businesses are more focused on profitability, the business owners speak of values. Caretaking of stakeholders, economic footprint, and social activities have continued to grab importance in today’s world.
If your values are essential to you, then you must learn about ESG investing in today’s world. ESG stands for Environmental, Social, and Governance. And ESG investing gives you a great feel. You know your money is flowing to better businesses. You know you are making a difference. Or at least – playing your part in not helping the worst.
What is ESG Investing:
As mentioned earlier, ESG stands for Environmental, Social, and Governance. It covers areas that characterize a sustainable, responsible, and ethical investment. Together, ESG Investing is a step toward solving many global challenges –inequalities, deforestation, and climate change.
Investors today are becoming increasingly concerned about the non-financial factors of businesses they invest in. The sustainability question has brought investors to apply such non-financial factors as a part of the analysis to identify material risk and growth opportunities. This forms a vital evaluation criterion for the investors before deciding to place their money.
Sustainable investing delivers through harmonizing traditional investing with the ESG visions. It is the new evolution.
The ESG trend:
The ESG investing figures continue to increase. By 2021, the money held in the sustainable mutual funds and ESG-focused trading funds rose to $2.7trillion, recording an increase of nearly 53% YoY.
According to Bloomberg Intelligence, assets related to ESG investing are likely to grow from their current value of $35 trillion to $50 trillion by the Year 2025.
What is driving ESG Investing?
Most global corporates have already undertaken socially and environmentally responsible practices. The corporates are now pressuring their suppliers to adapt to the ESG practices. For example, if the company in the UK decides to change its policies, its supplier in India or Bangladesh would want to think about nice environmental upgrades.
The relevant regulatory bodies are issuing streamlined reporting guidelines, and the governments are becoming increasingly concerned about the ESG. There are now requirements for companies in the developed world to control their Co2 emissions, etc.
The reason for all this happening is because stakeholders, including the employees, the creditors, the customers, and others, are putting businesses under greater scrutiny. The stakeholders today want involvement with corporates following best practices. The supply chains are now focusing on the overall ESG-related business principles.
An ESG example from the recent –Dubai Investment Fund (DIF):
Since its establishment in 2001, the Dubai Investment Fund (DIF) has grown to become the UAE’s major player in the economy. Employing approximately 920 investment professionals, DIF has 17 global offices and carries an experience of over 21 years today. The company’s tagline explains much – “We are a generational investor, seeking to make a difference with tomorrow in mind.”
DIF, in recent years, has pledged to the highest standards of Corporate Responsibility. Starting reporting through its Sustainability Report, initiated in 2019, DIF is committed to serving communities, championing relevant social advocacies, and preserving UAE’s rich culture and heritage.
The year 2020 – revolutionary changes for the DIF
The DIF already had an ESG team in place for many years. However, it was the year 2020 that brought significant positive changes for the DIF’s overall investment strategy. An overall redefining with consideration of the growing importance of the climate change issues was the primary step undertaken.
Previously, non-renewable energy sources had a significant portion within the portfolio of the DIF. Recently, the management decided to move away from it. The decision included a gradual reduction, a part being replaced by environmental-friendly investments, including investment into friendly technologies for renewable energy resources.
In 2020, a few of the companies DIF invested in were “Clean Wind,” “Energys,” and “The Next Shore.” That year, significant and large investments were also made in the IT sector – DIF invested in stocks of Shopify, HP, and Dell.
While DIF had already invested in various projects and startups for renewable energy under the ESG, the focus was now steadier. ESG-related rules were part of the approach. The leadership of the DIF stated that every major company should start taking its position in protecting the environment and mitigating the climate risks posed by the corporates. The fund started putting its idea into practice through 2020 with over 05 significant investments into the ESG-mandated projects made during the year.
The year 2021 shows continuation into ESG…
DIF continues the ESG investing. In 2021, DIF invested in renewable energy sources and net-zero companies. DIF held a conference dedicated to sustainable and responsible investments to highlight their importance. The meeting was born as a mixture of online and offline formats, gathering hundreds of investment experts, researchers, and analysts from around the globe. The conference offered a platform for fruitful discussions, updates, social networking, and, most importantly, newer partnerships.
For DIF, 2021 acted as a year of many ESG Investing. During the year, the fund invested in many startups and early-phase projects working on innovative healthcare solutions. This idea of DIF occurred mainly after the pandemic that such projects were needed worldwide.
Simultaneously, the DIF continued to work towards building several renewable energy projects. The wind power stations in Netherlands and Germany, a geothermal energy project in Northern Ireland, and three solar power plants in the MENA region were all developed during the year 2021. Further that year, significant investments were made in the First Solar, NextEra Energy, Sylergy and Brookfield Renewable projects, DIF invested in stocks of these companies and took stakes in them.
The Year 2022 – No more stopping with ESG Investing:
A fortnight ago, DIF announced the creation of a full-fledge ESG Investment Department. Eustace Osborn, the Head of the new ESG Investment department, said, “Investing in areas that will bring both profits and long-term benefits for the whole community is one of our main principles. Today we are taking it one step further, announcing the creation of a new department specifically dedicated to ESG Investment. The term ESG gained popularity during the last two years and now represents one of the major trends in the financial and corporate world.”
The ESG Investment Department would function on the following principles:
- Elaborating accurate and reliable methods of estimating ESG rating
- Researching related areas, such as “green investment” and “ethical investment.”
- Incorporating ESG investing principles as a part of the long-term strategy
- Monitoring global and local ESG markets to find out promising investment opportunities
- Providing clients with a tailored approach for ethical investments.
ESG Investing – a cost for corporates?
Arise some essential questions, why would funds and businesses want to move into ESG investing? What’s in for them when it adds to costlier business methods?
Sharp, Senior VP of C2FO, stated in an interview that the company’s performance was previously judged purely on financial performance. However, that was changing. ESG was becoming the second most crucial factor in evaluating a business’s performance. Companies must now pay attention to their wider stakeholders, including employees, customers, partners, etc.
The customer’s awareness of the ESG means they are now well-equipped with information about a company’s ongoing activities related to ESG. Any lousy reputation could lead to a business losing sales with customers not buying at a protest to business activities.
Additionally, with the investors looking for ESG as an evaluation criterion, there may be no cheaper funding or any funding available for businesses not following the ESG practices.
According to Gartner, ESG is now considered by 91% of banks, 71% of fixed income investors, over 90% of insurers, and more than 24 global credit-rating agencies.
With the above stats available, it is straightforward. Either business will have to follow the ESG or lose their sales and investments.
ESG and Sustainability Investments are to grow much faster in the future. Sustainability Magazine forecasts that by 2025, approximately one-third of all global AUM (asses under management) would have ESG mandates.
The first movers to accept the change are consistently successful. Trends are always influential. Especially the ones that motivate investors in social improvements. It would be best for the businesses globally and the investment industries to become ESG-friendly to grow. Any resistance to such a trend can lead corporates to go out of business.