Following a year of massive growth in environmental, social and governance (ESG) funds that observers say coincides with a bull market, investors and portfolio managers are now facing a lull as interest in such funds is seeing a sharp slowdown in the first half of 2022.
This latest development in sustainability-focused investing may have angered some in the market, but experts say the short-term pause has also given businesses and investors time to assess and evaluate how to proceed. ESG-related products deliver the results they seek.
Clockwise from top left: Mara Chiorean, Elisha Harrington, Cherine Fok and Bradley Busetto. Photo: Eco-Business
Speaking at a senior leadership roundtable held recently, and focused on how top management in the finance and human resources sectors can drive effective ESG management, Australia and New Zealand Banking Group (ANZ) sustainable finance said director Mara Chiorean that as many conditions are driven by geopolitical turbulence playing a large role in the ESG collapse, the market is also grappling with investor fears of greenwashing – the labeling or marketing of products as sustainable or green when that is not the case. “These investors are becoming stricter and there is more analysis of what is considered sustainable. Previously, we were able to make ESG investment decisions based on assumptions, promised impact or potential, but now it is starting to we see questions emerging: How is this being delivered? Could this be a marketing gimmick rather than a way to drive business change?”
“Investors are looking for results. There needs to be a demonstration that the capital being invested is actually delivering the expected impact, or the added value brought about by sustainability. It takes time to rebuild that trust,” said Chiorean at the private roundtable, jointly organized by ServiceNow, a California-based digital workflow company, and Eco-Business.Eco-Business was given access to report on the event.
Former United Nations diplomat and now co-CEO of sustainable investment firm SDG Impact Japan Bradley Busseto added that the rapid growth of ESG-focused products over the past few years has not “moved the needle” because the investors often use an exclusionary approach – removing specific assets that conflict with their criteria, such as avoiding investments in countries with poor human rights records or weapons stocks, but otherwise everyone uses a common investment strategy.
Busseto argues that ESG now needs to focus on “proactively changing things”, where there is deep engagement with companies in developing specific ESG-related indicators, metrics and levers that can drive of performance.
“This means looking at how we can improve our current range of ESG investment products and helping to move the capital markets in the right direction. We need to define the next generation of ESG investing,” said Busseto, adding that companies should also tap into the technological solutions currently available, including sustainability platforms driven by artificial intelligence, to improve their reporting and decarbonization efforts.
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Investors are looking for results. There needs to be a demonstration that the capital invested is actually delivering the expected impact, or the added value brought about by sustainability.
Mara Chiorean, sustainable finance director, Australia and New Zealand Banking Group
Beyond ESG compliance
Even with enhanced scrutiny and safeguards, experts at the roundtable say companies are now confident that ESG practices are benefiting their bottom lines.
Cherine Fok, director of sustainability services at KPMG Impact, an accelerator for the professional services firm of KPMG’s global ESG strategy, said that ESG is becoming top of mind for senior executives, and companies are beyond compliance, to see how ESG-related metrics can do. help advance their business.
“[Companies] are focused on what ESG impact will be for their business model in the future, through a more strategic and operational lens,” Fok said. “We’re starting to see signs through board engagement , as well as overseeing top leaders where they ask exactly what role ESG plays within the scope of their responsibilities and the mandate they have in formulating how ESG is going to be integral to their business. ”
A recent study shared by ServiceNow showed that 73 percent of finance leaders reported that a focus on ESG has helped their companies deliver better financial results, as those global consumers are five times more likely to trust, buy, champion and protect companies with strong ESG goals.
Busetto points out that ESG metrics are increasingly visible and proven as a driver of overall financial performance in companies.
“More ESG-focused companies are beating the benchmarks,” Busetto said. In July this year, news agency Reuters also reported that research obtained from a sustainability data firm shows that stock funds have outperformed global markets over the past five years if they are weighted by companies with positive ESG scores.
Busetto believes that Asia, traditionally seen as a laggard on the ESG front, now has an opportunity to capitalize on this development. To make ESG part and parcel of their business strategy, Busetto believes companies need to build metrics around it, link compensation to sustainability indicators and “really put the money where the mouth is.”
Bringing net-zero innovations to market
Globally, more than 3,000 businesses and financial institutions are now working with the Science-Based Targets Initiative (SBTi), a globally accepted benchmark for ensuring accountability in emissions reduction efforts, to be assessed and validated their set net-zero targets. In Asia Pacific, nearly 300 organizations have done so and the number is growing.
Chiorean said that the number of promises is welcome but the next step of fulfilling these “big and broad promises” is more important, and that will mean scaling up existing technology and innovations that related to sustainability, and creating a path for mass market adoption of these solutions. “This is where the rubber meets the road. For example, in the case of green hydrogen, we need to show how switching to this alternative fuel source can lower carbon emissions.”
Similarly, Chiorean highlighted that investments are being poured into the alternative protein sector and into cleaner aluminum production technologies. “But how will the technology be available in the future? Will everyone develop themselves and does that mean it will take decades for us to see results? Or will there be wider adoption and market disruption ?”
Elisha Harrington, senior director of ServiceNow’s chief innovation office and moderator of the roundtable said that sustainability also prompts multidisciplinary collaboration, as in the case of banks that continue to work with technologists, climate scientists and university academics to create solutions for the climate problem. “These people used to work alone or with people in a similar field, but now they’re looking outside and recognizing that they need other expertise to help solve these complex problems,” he says.
Fok agrees that new synergies and business structures are now emerging where collaboration and partnership are more purposeful. “There is hardly an organization that we work with today that can do that [sustainability] mandate to themselves,” said Fok. “This could ultimately result in a fundamental change in how our economy works, where the role played by a company also changes.”
For now, experts believe that achieving true ESG integration requires more work. Fok describes the entire process as similar to running a relay race, where individuals within an organization with different skill sets work toward the same finish line, but also work together and “pass the baton” when they run out of stamina.
“Organizational alignment is the biggest challenge, because we are used to setting performance targets and incentives that are individual-centric and people are not used to working towards a collective goal. This is where leadership becomes important, and organizations are able to differentiate themselves if they have leaders with strong business acumen.