ESG has officially gone mainstream. Environmental, Social and Corporate Governance, or ESG, are the three central factors in measuring the sustainability and societal impact of an investment. ESG has become both an asset class, an investment strategy and a set of operating principles.
Propelled by a growing sense of urgency to address significant issues such as public health emergencies, climate change, social justice, and the challenges of feeding an ever-increasing global population, ESG investing has seen a rapid evolution. As of mid-year 2020, the value of global assets applying Environmental, Social and Governance data to drive investment decisions passed the $40 trillion milestone. Fund flows continue to accelerate, doubling in the past 4 years, driven by the realization that sustainable practices are not just about doing good, but they are in fact good business. For ESG’s enabling technologies, look for this to be a key driver of demand and investment dollars for years to come.
A recent BlackRock whitepaper observed: “ESG investing is not just about doing good. A growing body of research points to a link with asset performance. Companies that manage sustainability risks and opportunities well tend to have stronger cash flows, lower borrowing costs and higher valuations.” In fact, a study by Deutsche Bank found that companies with highly rated ESG factors have lower cost of debt and equity. 89 percent of the reviewed studies showed that companies with high ESG ratings outperform the market in both the medium (3-5 years) and long (5-10 years) term.
The ESG asset class could be described as a 300-year-old overnight phenomenon. ESG investing and its predecessor, Impact Investing, both build on the foundation of Socially Responsible Investing (or SRI) that dates back as far as the 1700’s when religious groups like the Quakers refused to participate or invest in the slave trade. SRI had a resurgence in the 1980s, when companies, pension funds, and individuals consciously divested from South Africa in protest against the Apartheid system.
ESG, as we know it today, began in the early 2000s with the introduction of the UN-backed Principles of Responsible Investing (PRI), providing a framework for the data-driven approach that underpins ESG. In the last five years, fund flows have dramatically accelerated, as ESG-investment vehicles proliferated. MorningStar introduced an ESG ratings system, and industry leaders like CALPERS, Blackrock and Goldman Sachs announced increasingly significant commitments to the principles.
For innovators, entrepreneurs and investors in the middle market, the ESG imperative provides exciting opportunities. As large, publicly-traded corporations are under increasing pressure to demonstrate a commitment to ESG business principles, the innovative solutions that enable this type of change will be beneficiaries of the trend. Innovators in the areas of renewable energy, water management, ag tech, work tech, health and wellness represent a few examples of the industries where enabling solutions should attract capital and premiums as the business community is drawn to the high rates of return that solving some of the worlds’ most pressing problems presents.
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