Globalization has been accompanied by a lack of governmental regulations. Countries in the global South were too dependent on multinational corporations to be able and willing to demand that mining companies, buyers of cash crops such as tropical fruits or cotton, and industries outsourced from Europe comply with minimum environmental and social standards.
Neither the polluters nor the consumers had to bear the costs of an unsustainable economy. These costs were “externalized”. What was observed for the manufacturing sector was also true for the financial sector. Sustainability was something for idealists. So far. The climate and biodiversity crisis has led to a rethink. The term “ESG” has become established as the standard for sustainable investments.
What does ESG stand for ?
These three letters describe three areas of responsibility related to sustainability for companies. It is an attempt to divide the complex topic of sustainability into three areas in order to establish categories to which a company acting responsibly should pay attention:
- The “E” for environment stands here, for example, for environmental pollution or endangerment, overexploitation of nature, greenhouse gas emissions or energy efficiency issues (Environment).
- Social (“S”) includes aspects such as occupational health and safety, human rights in the supply chain, diversity or social commitment (corporate social responsibility).
- Governance (“G”) is understood to mean sustainable corporate management and includes, for example, topics such as corporate values or management and control processes (corporate governance), but also issues such as tax optimisation.
What applies to manufacturing companies must also be taken into account by banks or insurance companies that claim investing sustainably.
What exactly does it mean to integrate ESG criteria into the investment strategy?
Integrating ESG criteria into the investment strategy starts with the development of investment ideas, continues with portfolio construction and risk management of a financial product and can go as far as influencing companies and markets. Concrete investments can be made
- in the most sustainable companies in selected sectors (“Best-in-Class”);
- in companies that offer solutions to specific environmental and/or social problems (“theme funds”);
- or in areas where positive changes in ESG criteria can be measured (“impact”).
Fund managers often use labels to separate the wheat from the chaff when selecting stocks or bonds.
The fact that more and more financial players are starting to pay attention to ESG issues is generally a positive thing, although many players do so less for reasons of discernment than for image reasons and to reduce risks. In doing so, they are building pressure on companies to become more sustainable.
A similar approach that operationalizes these issues and describes them even more succinctly are the 17 Sustainable Development Goals (SDGs).
What about the implementation of ESG criteria in the financial sector ?
In 2006, the Principles of Responsible Investments (PRI) network was developed. The Unites Nations- backed PRI is an initiative for the voluntary commitment to integrate ESG factors into investment decisions and asset management. A good 2,000 banks and insurance companies worldwide have signed up to these six principles, including Baloise. In terms of the seriousness of their concern, they are clearly distinguished from providers of financial products who claim to be “green” without making this verifiable for laypersons (“greenwashing”).
On the other hand, ethical finance institutions, of which etika is one, attach great importance to transparency and strict criteria. The pioneers of the industry have been operating according to strict sustainability criteria for over 40 years. For almost 25 years now, our customers have also been informed in detail about where their money is invested: organic farms, wind farms, projects to help the unemployed or marginalised groups. This has been a niche until now. Conventional providers remained non-transparent and free of specifications.
It was therefore a “bombshell” for the financial world when the Paris Agreement of 2015 underlined the determination of policymakers that much of the financials world`s investments should be redirected to those parts of the economy that reduce CO2. Under Commission President Jean Claude Juncker, the EU´s “Sustainable Finance Strategy” was created, and his successor Ursula von der Leyen continued this Strategy with the “Green Deal”. A core element is the so-called taxonomy, which leads to transparency and less greenwashing. The aim is to strengthen the understanding that the inclusion of ESG criteria also makes products more sustainable and that companies can reduce risks as a result.
If one wanted to criticize this positive development, one would have to point out that the “E” is still too dominant, while the “S” and the “G” are still largely unlit. Given the urgency of the climate crisis, this is understandable. And one might wish for a more concrete vision of a sustainable economy, rather than just a call to refrain from harmful economic activity.
Nevertheless, this incentive to see unsustainable behaviour as a risk is a first important step towards internalising the social and environmental consequences of production mentioned at the beginning. It is an optimistic start on the road to implementing the polluter-pays principle.