Ignoring climate change and continuing business as usual is only accelerating and advancing future risks, according to the latest IPCC report. It is expected that global warming will exceed the internationally agreed-upon limit by the end of the century. There will be chronic water insecurity for 3 billion people, and many staple crops will be threatened, which will lead to hunger around the world. Additionally, coastal cities will be forced to relocate due to rising sea levels, and more than 25,000 species will be wiped out by natural disasters. This is not a speculative statement but a fact.
To reverse the tide of climate change, what else can we really do besides alter our daily routines and buy sustainable brands? In addition to being conscious consumers, we can demand action through the investments we make. We can control whether our investments have a positive or negative impact by choosing what we invest in.
We can invest in our future by combining environmental, social, and governance (ESG) investing with impact investing while generating both social and financial returns. Investing in and/or buying from companies with more diverse leaders and decision-makers can help prioritize people and the planet, reduce inequalities, and steer money and power away from countries and companies that violate human rights by living within their environmental means. We can prevent a climate catastrophe by taking this step forward.
Businesses rely on consumers and investors for the majority of their revenue. Our capital enables them to finance their operations, giving us immense power to change the world. ESG, impact investing, and other forms of socially responsible investing are powerful tools for saving the planet. Capital should be reallocated toward companies with high standards and away from fossil fuel companies that are worsening climate change. This will make it increasingly difficult for companies to make profits without prioritizing people and the environment.
How Climate Change is Manifesting Itself Today
Climate change continues to hold the world back from meeting the Paris accord’s most ambitious goal: limiting global temperature increases to 1.5 degrees Celsius (2.7 degrees Fahrenheit) above pre-industrial levels. Even in climate-conscious Europe, Russia’s war in Ukraine has prompted a rush for fossil fuels in the near term. Global food crises, escalating natural disasters, and collapsing ecosystems are all likely to follow beyond that threshold, experts warn.
With the world already has warmed by 1.1 degrees Celsius (2 degrees Fahrenheit), deadly climate change impacts are already being felt. A record-breaking heat wave has scorched crops and sparked wildfires across Europe. Seoul was deluged with the heaviest rainfall in more than 100 years, resulting in at least eight deaths. Across Mexico and East Africa, drought has ravaged crops and exacerbated hunger. As a result of extreme heat, floods, and raging wildfires, people are dying in the United States.
In Pakistan, the ongoing floods are ravaging and displacing families. Pakistan’s government estimates that $10 billion worth of damage will result from the floods, which have already killed more than 1,300 people and destroyed 1.2 million homes.
It is clear from these disasters that adverse climate change continues to outpace political action, despite an exploding body of scientific research. According to Cobb, a climate scientist at Brown University and the lead author of the IPCC’s most recent report on the science of climate change, even a historic investment like the Inflation Reduction Act pales in comparison to the scale of the crisis.
A sustainable natural world is essential to the global economy – and we all benefit from it. A loss of biodiversity and ecosystem services caused by climate change could cost the world economy $2.7 trillion by 2030, according to the World Bank. By continuing on this path, we will face massive disruptions that will force businesses to reevaluate their role as global stewards of multiple stakeholders. If they don’t, they won’t survive.
Property values and coastal infrastructure are at risk due to rising sea levels. There will be disruptions in business operations and supply chains around the world due to water scarcity. Fossil fuel regulations, climate change regulations, and impact disclosure requirements will require businesses to prioritize sustainability equally with financial performance. Investors and consumers will increasingly favor more sustainable companies, which will harm companies’ reputations. According to the 2020 Consumer Culture Report by 5WPR, 83% of millennials prefer to be associated with companies that share their values.
Investors representing trillions of dollars are beginning to realize this today. Their passion is exchanging dollars for a difference. In a survey conducted by Domini Impact Investments, more than 50% of respondents were willing to sacrifice performance to achieve their ESG goals.
In 2020, more than 80% of ESG funds outperformed their benchmarks, according to a study by Harvard Business Review. The reason is that today’s most progressive and visionary business leaders are already ahead of the curve. They recognize that installing low-carbon, climate-resilient water infrastructure, and providing higher-quality health care for all is an investment in the future versus a drain on short-term profits. Solar and wind energy, for instance, provided 10% of the world’s electricity last year and have enormous potential for scaling; malaria eradication efforts are predicted to generate $4 trillion in economic gains by 2030, and 85% of the world’s population consists of emerging consumers who wish to access basic services and goods.
The Role of ESG in Prevention of Climate Change
We are experiencing the impacts of climate change, mourning the loss of species, and protesting injustice. However, many of us contributed to creating these scenarios, and we can also play a major role in mitigating them. One way to make sure people and the planet have a sustainable future is through the use of environmental, social, and governance (ESG) investments.
Investments based on ESG (environmental, social, and corporate governance) consider the non-financial issues of a company and how it manages externalities. Environmental, social, and governance initiatives are actions companies take to influence and challenge their environmental, social, and governance impacts. A key goal of ESG is to create business value while making a positive impact on society and the environment. As per Bloomberg, $53 trillion investment in ESG is predicted to occur by 2025, making it more than just a fad.
At the moment, companies who aren’t implementing ESG initiatives are missing the boat, especially in AEC and manufacturing. Globally, 60% of carbon emissions come from the AEC and manufacturing industries. Supply chain complexity and labor shortages increase risk of climate change. Compared to other industries, AEC and manufacturing are also less diverse.
ESG initiatives require a financial investment, but the long-term benefits will far outweigh the costs. First, by embracing ESG, companies will increase equality and reduce emissions, which is ultimately beneficial to society and the planet. It will also be easier to complete the process under the new SEC rules. In addition to buying renewable energy and carbon offsets, companies such as Autodesk are joining movements like the UN’s Race to Zero Campaign and The Climate Pledge. The world will be better off if every company does its part.
Better Business Opportunities with ESG Investments
In a study conducted by the Stern School of Business at New York University, companies that engage in ESG reporting have greater valuations over time. It is possible to maximize revenues by managing ESG risks in a way that supports equity, reduces emissions, ensures customer privacy, and fosters diversity to enable innovation. According to the Stern study, companies that prioritize ESG are more resilient during a societal or economic crisis, which is attractive to investors, especially when considering the lessons learned from the COVID-19 outbreak.
By focusing on “doing more good” instead of just checking boxes, ESG investments demonstrate your conscientiousness, which translates into more business. As a result, they also attract and retain talent, a significant advantage in the current job market. It is this type of smart governance that piques the interest of investors and produces higher returns.
New criteria are driving today’s generations of investors. In their view, climate change and inequality are high stakes, so not addressing them would be more costly. As a result, corporations are responding. A powerful trade association, the Business Roundtable, redefined what a corporation is in 2019, focusing on customers, employees, and communities in addition to shareholders.
Companies’ ESG ratings reveal what they are doing to mitigate risks. The ratings continue to evolve and expand-some even include cybersecurity and geopolitical risks-but they set a benchmark for companies to see how they compare to their competition and what they can do to improve. Carbon emissions and social reporting are also being standardized by the public sector, specifically in the EU and US. Despite the fact that there is still work to be done, there is greater clarity around what companies are expected to report in order to meet a specific ESG standard. It is becoming increasingly apparent to companies that what is good for people and the planet is more valuable than short-term financial gains. Profits remain paramount. However, socially responsible and environmentally sound practices can boost profits tenfold. Investors, customers, and employees value them as well. In the long run, companies that embrace ESG will definitely succeed.
Long-term investment horizons are more likely to yield ESG benefits. Longer time horizons also increase the likelihood of ESG risks and unsustainable practices negatively impacting financial returns. Generally, companies face depreciating assets due to changes in regulations, social expectations, disruptive technologies, or environmental conditions. ESG-related changes may be better anticipated and adapted by companies with sustainability plans. As an example, a fossil-fuel company may have to decommission and write-down assets and cancel projects in order to replace them with renewable energy programs. Having insufficient CSR policies can result in a beverage manufacturer being liable for a city’s water scarcity, facing consequential legal risks, and facing reputational and punitive damages.
Limit Investment Risks
Nature, business, and the economy are interconnected in a way that may not be obvious. Global supply chains are intrinsically linked to the environment. A substantial portion of the world’s total GDP (more than US$44 trillion in economic value created) is reliant on nature, particularly in agricultural and forestry sectors, as per World Economic Forum. By understanding the hidden risks of biodiversity and nature loss, as well as their impact on the economy and investments, investors may be better positioned to enhance portfolio resilience.
Due to their stronger governance practices and better business ethics, investing in ESG-oriented companies may reduce overall investment risk. Increasingly, initiatives like the United Nations Principles for Responsible Investment (UNPRI) require members to incorporate ESG factors into their investment decisions as a fiduciary duty. In addition, more stock exchanges require ESG disclosures; Hong Kong’s HKEX and Singapore’s SGX, for instance, require listed companies to submit ESG reports every year.
ESG Firms Deliver Outperformance
Relative performance measures outperformance. In comparison with a benchmark fund or standard index, it could result in more gains and fewer losses. From a governance perspective, investee companies that integrate ESG more thoroughly tend to perform better financially. In addition to sustainability strategies, ESG-focused companies typically have better operational efficiency, cost savings, lower turnover rates, innovation, retained talent, reduced compliance costs, and better risk management – all of which may increase shareholder value.
Generally, ESG-label funds have outperformed over the medium to long term. According to Morningstar, sustainable funds have outperformed their traditional peers (delivered higher returns). Moreover, 77% of these funds still exist today, whereas 53% of traditional funds have dissolved.8 In fact, research shows that funds considering ESG factors outperformed their conventional counterparts that did not consider environmental, social, and governance factors.
Aside from this, ESG funds have also shown resilience during times of heightened market volatility. As a result of the COVID-19 sell-off in 2020, an MSCI study compared three global ESG indexes with the parent index, MSCI All Country World Index ACWI. Over the same period and onwards, the ESG measures outperformed the traditional benchmarks.
ESG Shift is Mandatory to Mitigate Global Crisis
Recent events in key world regions have forced global thought leaders to reconsider their approach towards sustainability. Even conservative leaders are starting to recognize the damage caused by human-influenced climate change. Investors are also increasingly focusing on ESG as a mainstream long-term investment strategy, which can help them align their financial goals with their values, as well as build a sustainable world.
Investments can be sustainable and positive with ESG strategies without compromising investment returns, which is good news for investors. As a result of ESG investing, investors may be able to build a better investment allocation. As a result of incorporating sustainability factors, risk management is improved, partly because ESG-compliant firms have lower costs of capital (e.g., lower borrowing costs in bond or equity markets), a lower risk premium, and a lower risk that their assets will become stranded or worthless due to greater transparency.
ESG practices are proven to lead to higher financial growth and optimization, lower volatility, higher employee productivity, fewer regulatory and legal interventions (fines and sanctions), and cost reductions. In contrast, companies that performed poorly on ESG had higher costs of capital and higher volatility due to controversies and other incidents, such as labour strikes, fraud accounting, and other governance irregularities.
ESG could potentially become a critical factor to prevent further damage from the climate crisis.
Companies must incorporate ESG into their DNA in order to remain competitive and stay ahead of regulations. Organizations that fail to comply with environmental or social factors may face regulatory, legal, or reputational issues. The best course of action is to implement a methodology that reflects sustainability and ESG. ESG is easier and faster to implement from the start, so the next generation of unicorns or Fortune 500 companies will be more diversified and equal, caring more about their employees’ health and wellbeing, and positively contributing to their communities and the environment in the process.
As far as the climate crisis is concerned, the devastating effects of it are unfolding right in front of us, and if we do not act now, there may not be a world to save. Climate change, biodiversity loss, and the erosion of marine environments and wildlife have been impacted by human activities in recent decades. In general, corporations and governments are being pressured to play a more active role to counteract the impacts of climate change. It is essential to mitigate further damage and help the environment by investing in companies that are ESG-oriented. Carbon emissions are being reduced through green bonds, for example, to improve air quality.
Bringing these ESG goals to life will be up to leadership. We cannot achieve the industry-wide impact we need without proactive leadership. If C-level executives want solid bottom-line results from their strategic business decisions, they must focus on sustainability and make decisions for the greater good.
