Investors See ESG Issues as a Predictor of Quality of Management
Submitted by: ICWords Ltd.
2012-06-20 10:00:13
Sofia (OPENPRESS) June 21, 2012 -- Investors see corporate policy on environmental and social issues as an actual predictor of a company's quality of management, revealed the book The Business Case for Sustainable Finance, edited by Iveta Cherneva and launched at the BTA Press Club in Sofia.
On the first day of the United Nations Rio+20 conference on sustainable development, as heads of state gather in Rio de Janeiro to discuss the sustainable development agenda, a number of global financial institutions report that they see a commercial case for sustainable finance.
"Analysis of environmental, social and governance (ESG) factors can provide investors with a rigorous set of data points on which a reliable assessment of the management quality of a company can be made", said Amanda McCluskey, study contributor and head of responsible investment at Colonial First State Global Asset Management, an Australian asset manager with US$144.2bn under management. "A good work safety record and low rates of staff turnover are indicators of a well-run company; a company that continually improves its efficiency metrics, such as energy and water use per tonne of production, is typically a well-run company", she added.
"From human trafficking zero tolerance policy to safety standards, addressing issues in the human rights and labor spectrum has a positive impact on returns", said Iveta Cherneva, editor of The Business Case for Sustainable Finance and executive director, ICWords Ltd. "Compliance with human rights and labor standards serves to protect businesses against unnecessary costs associated with third parties, unforeseen internal operational problems and unexpected negative externalities that affect returns. This is not the usual lens through which we are used to seeing human rights and labor - they usually mean costs. But compliance can also be a cost-cutting strategy for a company", Cherneva added.
The study reports that the presence of a corporate policy on human trafficking indicates a company's overall preparedness to avoid financial and legal traps.
The research indicates that financial institutions' liability associated with social issues, human rights and the environment is another measure of the bottom line for financiers. "The increasing incidence of human rights and environmental litigation has often accompanied an increase in the strength of legal liability and the costs of defending suits", according to Mark V. Vlasic, senior fellow and law professor at Georgetown University, and principal at Madison Law and Strategy. "Whereas most corporations experience losses only for direct or secondary ESG violations, financial institutions may also experience losses when their borrowers and investment partners do. The litigation costs of financing ESG violations have often become more burdensome than the costs of creating ESG-consistent policies and controls", Vlasic added.
To finance institutions, addressing environmental issues is also about new opportunities. "The US Wetland Mitigation Banking model and the Reducing Emissions through Deforestation and Forest Degradation (REDD) model demonstrate the tangible commercial value of biodiversity capital to financial institutions", said Richard Burrett, partner at the UK-based investment firm Earth Capital Partners and senior associate at the University of Cambridge Programme for Sustainability Leadership."We are only beginning to understand the relationship between natural and economic capital. What the finance industry is beginning to learn is that the rapid decline and loss of biodiversity and the degradation of the ecosystems that sustain it will impact economic growth and business profitability in the future if we continue to operate in a business as usual mode", he added.
"There is also the low-carbon financial opportunity, which is defined by two complementary trends: first, taking energy out of the economy through improvements in efficiency; and second, taking carbon out of energy by curbing emissions from fossil fuels", added Nick Robins, head of climate change centre of excellence at HSBC.
The study also examined the business parameters of sustainable finance in select emerging markets. "In the world's second largest economy China, there is an increasing awareness and alignment of ESG factors within the financial sector and the broader economy in response to a host of developmental issues that the country continues to face. The central economic and fiscal control of the state provides commercial barriers and incentives to the finance sector and various other industries to achieve policy and regulatory compliance on environmental standards," said Hong Kong-based Ben Ridley, regional head of Public Policy - Sustainability Affairs for Asia Pacific at Credit Suisse.
"In South Africa finance institutions face significant risk-associated challenges related to climate change and the conservation of natural resources, which require a framework for ESG risk identification and a long term strategy for effective risk management", said Madeleine Ronquest, head of environmental and social risk at FirstRand Group Ltd., one of the largest financial institutions in South Africa.
"There are associated risks with investing in emerging markets", said Helena Vines Fiestas, co-head of SRI research and head of sustainable thematic research at BNPParibas Asset Management. "This means that investors need to look beyond stock-specific issues and take a more holistic approach to risk management that encompasses wider structural risks", added Rory Sullivan, strategic adviser at Ethix SRI Advisers.
"In microfinance, integrating ESG indicators has been accepted as an essential element of mitigating risk and avoiding investment in 'unhealthy' institutions", said Dr. Harry Hummels, managing director of SNS Asset Management. "In this context, there is an added value to combining financial and non-financial metrics", added Marieke de Leede, impact & investment analyst at SNS Asset Management.
"Fiduciaries have a duty of care to act in the best long-term interests of their beneficiaries. This includes a consideration of the broadest set of factors that could impact the performance of an investment. It also makes economic and investment sense for investors to allocate capital where it can be used most productively. In this sense, environmental, social and governance considerations link directly to a business case and a commercial way of thinking, transcending the simply ethical investment paradigm", concluded Amanda McCluskey.
Notes to Editors
About the Book: The Business Case for Sustainable Finance is an edited collection published by Routledge in London and New York on 20 June 2012. Edited by Iveta Cherneva, it includes chapters by BNP Paribas, Credit Suisse, Colonial First State Global Asset Management, Earth Capital Partners LLP, FirstRand Group Ltd., HSBC, SNS Asset Management, Georgetown Law School, University of Cambridge Programme for Sustainability Leadership and University of Leeds.
About the Editor: Iveta Cherneva is the editor of The Business Case for Sustainable Finance and the executive director of ICWords Ltd. Her career includes work for the United Nations, US Congress, Oxford GEG and a number of think-tanks, in five of the world's diplomatic capitals, including Washington DC, Geneva, New York, Stockholm and The Hague. Cherneva is also the author of the book Trafficking for Begging (2011), co-author of Beyond Market Forces: Regulating the Global Security Industry (2009), and a member of the Atlantic Council's NATO Working Group.
For more information contact: Iveta Cherneva, Editor, The Business Case for Sustainable Finance, Routledge, 2012.
Reviews of "The Business Case for Sustainable Finance":
"Highly recommended. The book provides a truly global picture, drawing on the expertise of the foremost voices in the sustainable finance space." - Dr. James Gifford, Executive Director, United Nations Principles for Responsible Investment
"In this collection of outstanding essays - where the business case meets sustainable finance in China and South Africa; for poverty reduction and climate change; with microfinance and ESG analysis - the rubber meets the road and it will leave its mark. You won't want to miss it." - Steve Lydenberg, Founding Director, Initiative for Responsible Investment, Kennedy School of Government, Harvard University
"Topical and timely, the book will be useful to finance professionals, as well as students of finance. It addresses the elephant in the room: does sustainable finance make commercial sense for financial institutions?" - Colin Melvin, CEO, Hermes Equity Ownership Services Ltd.
"In Chapter 5 of The Business Case for Sustainable Finance, Richard Burrett elegantly highlights the risks and opportunities for the finance industry of the global loss of natural capital. It is just these issues - which still struggle for mainstream airtime amongst investors - that motivate the far-sighted business leaders we work with." Jake Reynolds, Director, Leaders Groups, University of Cambridge Programme for Sustainability Leadership.
