Every time a crisis hits, investors rush to buy gold and its price spikes.
Covid-19 was no different in this respect, but investors may have discovered a new safe-haven asset: ESG investing.
Environmental, Social and Governance (ESG) criteria are meant to assess the impact of a company’s operations over the world around it. While the climate crisis shed light on the environmental impact of corporate activities, covid-19 shifted the focus to the social responsibility of business. As a result, public pressure to do business responsibly is mounting.
But ESG investing is not a charitable move. It’s a smart way of investing. McKinsey showed that investment managers are willing to pay +10% premium for a company with a positive ESG track record. Some investment managers are willing to pay up to +40% premium, and it’s no surprise since intangible assets often account for more than half of companies’ valuation.
ESG investing is not a charitable move. It’s a smart way of investing.
Why ESG investing is the future (and the present) of finance
First, 76% of investment managers already signed the UN Principles for Responsible Investment (PRI), making $86 Trillion available for ESG investments. For firms highly dependent on external funding, like private equity or venture capital, investing in ESG positive companies can unlock a boundless stream of capital.
Second, with environmental regulations getting stricter and stricter, neglecting ESG ratings is a guarantee of getting into troubles. The EU taxonomy regulation obliges investment firms to disclose their ESG score by 2021, making it hard to raise capital for those that lack an ESG track record.
But the firms that do comply with the EU taxonomy will tap into an ocean of cheap and abundant capital, reserved for ESG funds.
Third, sustainable consumption is the wonder child of western economies. Sustainable products grow +560% faster than conventional products and represent +50% of the total market growth. Everyone knows that the younger generations are more sensitive to environmental and social issues, but not everyone knows that millennials already outnumber baby-boomers and will manage most of the wealth in the coming 10 years.
ESG investing guarantees future-proof sales in a fast-growing market.
Even during the covid-19 crisis, ESG funds performed better than traditional funds. Morningstar analyzed over 4,900 funds and found that “sustainable funds held up better than their traditional counterparts during the covid-19 sell-off in the first quarter of the year, outperforming in all but one category considered in the study.”
ESG investing is becoming a safe-haven asset like gold, but while gold prices climb during crises and plummet once economies go back to normal, ESG investment funds yield good returns in prosperous times, and continues to do so when turmoil happens. ESG investing is better than gold.
How can I know my ESG performance?
Until recently, doing an ESG analysis was a nightmare, it could take up to several weeks with Excel sheets and manual calculations. Whether you outsourced or did it in-house, the cost of an ESG screening was not affordable for most of the companies out there.
Today, data science has made progress and software solutions can calculate your ESG performance automatically, in a fraction of the time.
These 4 simple steps can save you 83% time and get the most accurate ESG rating right on your table.
1. Check out ESG software solutions available.
There are many solutions to estimate your carbon footprint, but not that many platforms include a whole range of ESG metrics. As the bulk of savings occur by automating manual work, more advanced solutions will generate far more savings. Bloomberg NEF examined a bunch of software solutions and published a list of the best software companies for corporate sustainability. Since that article was first published, Normative.io added many features to measure social and governance metrics, and it is now a full ESG solution.
2. Make sure the software complies with the EU taxonomy.
The EU taxonomy is a game changer for every single business in the European Union, especially those in the financial sector. In fact, from 2021 investment firms will be obliged to report on the ESG performance of all their investments with a strict new standard to be followed. If you’re not up to speed, I recommend you dive deep into the consequences of the EU taxonomy for your business. Ask the software provider if their calculations comply with the taxonomy regulation; if they don’t, keep searching for another solution.
3. Estimate the benefits of automating your ESG reporting.
Automating manual tasks always turns out in efficiency gains, but it can be hard to quantify the magnitude of these savings in advance. This ESG reporting saving calculator estimates the savings you could achieve by automating your ESG reporting in just 49 seconds. Use this tool to make your decisions, but also to communicate your colleagues the value of what you are working on.
4. Do a pilot ESG analysis with a portfolio company.
Investment firms own stakes in many different companies, but there is no need to buy a solution for the whole portfolio all at once. Ask the software provider to make a pilot project with one of your portfolio companies and see how it delivers. If you are happy with the results, you can extend it to the whole portfolio at a later time.
ESG investing is the new gold. It would be silly to miss the opportunity of generating astonishing returns, while improving the world around us. But if stakeholders are to believe that you are making a positive impact, your ESG reports need to display the right numbers.
Forget about Excel sheets and let technology give you a hand.
If you are ready to reap the rewards of ESG investing, Normative.io has a special offering for private equity and investment firms.
Hope this sparked some good thoughts. The world needs more ESG investing.
And you do too.