ESG: A passing fad or the new mainstream?

13 July 2020

According to EU data, the Siberian Arctic reached record temperatures in June, with some areas seeing rises of as much as 10 degrees Celsius over the month. Wildfires in the region have been fanned by the rise in temperature, resulting in the release of 59million tonnes of carbon dioxide. Scientists estimate that the Artic is warming twice as fast as the global average due to these abnormally high temperatures.

The Arctic is one of the key drivers of global weather systems and the change in conditions is likely to create a ripple effect across the world. Climate scientists are unsure what those effects are likely to be but more extreme weather, with heatwaves and storms, is likely to be the outcome. 

Environmental concerns such as global warming affect our industry in the form of Environmental, Social and Governance (ESG) investing. ESG investing means using Environmental, Social and Governance factors to evaluate companies and countries on how far advanced they are with sustainability. Once enough data has been acquired on these three metrics, they can be integrated into the investment process when deciding which equities or bonds to buy.

Christine Lagarde, president of the European Central Bank (ECB), has opened the door to using its €2.8trillion asset purchase scheme to pursue green objectives and has indicated that she will use all available powers to explore every avenue in the fight against climate change. She has promised to consider operational changes and has stated that she will use the asset purchasing powers of the ECB to target green bonds. Green bonds have become mainstream instruments over the last decade. They are potentially more liquid than some conventional bonds and the investor appetite is rich.

The ECB will be the first main central bank to use a flagship bond-buying programme to pursue green objectives and with the ECB leading the way, the Bank of England have indicated that they may follow. If multiple central banks get involved, this sends out a strong signal that the tide is changing.

Last week, the Chancellor announced that the UK Government will introduce a new £2billion Green Homes Grant for landlords and homeowners to help make their property more energy-efficient. Landlords and homeowners in England will be able to apply for a voucher to fund at least two-thirds of the cost of hiring tradespeople to upgrade the energy performance of their homes, with a maximum contribution of £5,000. The green grant will no doubt play a large part in our recovery from Covid-19, further highlighting the focus on ESG.

Shares in online fast-fashion retailer Boohoo Group have taken a significant nose-dive recently. Since hitting an all-time high of

433p in mid-June, the Boohoo share price has fallen by more than 30%. The drop has been triggered by allegations that workers in Leicester making clothes for Boohoo may be paid as little as £3.50 per hour. It’s unclear how accurate the reports are but this isn’t the first time that mud has been slung at Boohoo during the last year and some might say that there’s no smoke without fire. If you can’t trust the management, can you feel confident investing in their stock? Companies seen not to be treating their employees fairly with little focus on ESG are no longer as attractive to investors.

ESG investing isn’t a new concept, it began in January 2004 when former UN Secretary General Kofi Annan wrote to over 50 major financial institutions inviting them to participate in an initiative to find ways of integrating ESG into capital markets.

ESG investing is now estimated at over $20 trillion in Assets Under Management (AUM) or around a quarter of all professionally managed assets around the world. ESG is not to be sniffed at, it’s on a serious roll.

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