Sustainable finance differs from traditional finance. While traditional finance primarily focuses on financial returns, sustainable finance is concerned with a far wider range of returns, focusing on environmental, social and governance factors.
This topic is very close to my heart and my contribution will aim to create awareness and shed more light on sustainable finance.
Environmental, social and governance (ESG) is a concept that has gained traction over the past few years. The concept is becoming more prominent and prevalent in financial markets as more importance is attached to it. So much so that the number of companies considering the inclusion of ESG factors in their operational principles is ever increasing. This comes as more and more companies and investors alike realise that ESG factors help build a better world and reduce damage to the environment and society, creating long-term sustainable opportunities.
Environmental, social and governance factors should, therefore, be important elements that companies strive for and embed to supplement and complement profitability. In the longer term, overlooking ESG factors not only threatens the supply chain but also potentially puts a company’s goodwill and stock price at risk.
Breaking down the ESG acronym is not enough and it is thus worth sharing some specific examples of how ESG can be integrated into a company’s operating model.
On the environmental side, investors can consider how companies manage their impact on the environment, such as greenhouse emissions, waste and pollution, resource depletion, water use and deforestation.
The social aspect of how a company manages relationships with employees, clients and the communities can be gauged through the regard for human rights, the development and treatment of staff, the health and safety of stakeholders and oversight of the companies’ supply chain.
Companies can also be held accountable on governance and how they are managed or governed through the diversity and structure of the board of directors, executive pay, accounting standards, transparency, business ethic, culture, and the regard for shareholder rights.
Investor expectations, demographics, technology and regulatory change are also laying out the landscape of this evolving theme.
Sustainability, in all its forms, is becoming a focal point for capital market investors and issuers alike. According to the HSBC Sustainable Finance and Investing survey carried out in 2019, 94 per cent of investors consider ESG important.
Sustainability, in all its forms, is becoming a focal point for capital market investors and issuers alike
A study conducted by Barclays in 2018 shows that millennials (people under the age of 40), are particularly concerned about environmental and social issues. In fact, 43 per cent of respondents under the age of 40 had invested in sustainability-themed instruments compared to nine per cent of those aged 50 to 59, and three per cent of those aged over 60. There can be various reasons behind this, but more extensive education in school syllabuses and concern around climate change can be considered as key contributors.
Technology advances are also contributing to the cause. Electric vehicles, accompanied by significant advancement in battery technology are one typical example. Driven by increased awareness on environmental concerns, a study by Bloomberg NEF states that sales of electric vehicles are expected to increase by 90 times between 2015 and 2040, and account for 35 per cent of total car sales.
Regulation is also playing a very important role in sustainable finance, acting as a key driver for responsible investment as policymakers and regulators seek to put the global financial system on a more sustainable footing and address the long-term challenges of climate change and global inequalities.
As an example, the European Commission launched its Action Plan on Financing Sustainable Growth in March 2018. The action plan aims to deliver upon the commitments that the EU made at the Paris climate conference in December, 2015.
While a significant amount of public investment has already gone into green initiatives, the EU and its national governments recognise that if funding requirements for such initiatives are going to be met, then significant private investment will also be necessary. The EU’s action plan, therefore, aims to reorient private capital flows towards sustainable investments, to meet its climate and energy targets. Regulations to help the EU to deliver on its action plan will be phased in over a number of years.
The EU Green Finance regulations apply to a wide array of financial market participants such as investment firms, fund managers, insurance undertakings and pension providers. The key initiatives from this programme reflect the EU’s commitment to sustainability and low carbon transition agenda.
A series of regulations and directives are expected to be rolled out as from March 2021, with the application of the Disclosure Regulation. The Taxonomy, Low Carbon Benchmark Regulations as well as the ESG Updates to MIFID II, AIFMD and UCITS Directive will follow suit in the years to come.
As can be seen from the above, different forces are converging and aligning towards the ultimate goal of ensuring that investing is sustainable, contributing to the long-term benefit of investors and communities alike. Companies with good ESG performance tend to have better corporate governance and hence the advantage of long-term sustainability. Integrating ESG factors into the process of investing not only brings benefits to society but also effectively manages risks, and creates opportunities for investors.
With changing consumer habits, ESG sustainable brands and companies are more likely to be well placed to seize long-term opportunities.
To learn more about sustainable investments and ESG, visit HSBC’s Investment Academy at https://www.assetmanagement.hsbc.com.mt/en/individual-investor/investor-resources/investment-academy
Konrad Borg Myatt, CEO, HSBC Global Asset Management (Malta) Ltd