Why is there so much talk about ESG?
In the last few months, the term ESG has gained more and more space within the corporate scenario. Companies have brought up several discussions on the topic, adapting (or even creating) teams to work on the topic.
To better understand what ESG is we spoke to Professor Natalia Tamura; PhD in Communication Sciences from USP. Natalia is also a researcher and professor in the Public Relations course at Faculdade Cásper Líbero and the MBA from Aberje (Brazilian Association of Business Communications), she also represents the Association in the Communication and Engagement Platform of the UN Global Compact.
What is ESG and why is this topic being discussed so much nowadays?
ESG is the acronym for Environmental, Social and Governance. ESG means a set of factors and criteria that make an investment more sustainable in the sense of valuing environmental, social and corporate governance issues. It is a strategy in which profit is still the objective, although the way to achieve it is different: the money is reallocated for projects that aim at a fairer and more equal world and that present greater responsibility in using natural resources and preserving the environment.
The acronym came into existence in 2004 in a UN publication in partnership with the World Bank, called Who Cares Wins – Connecting Financial Markets to a Changing World. It arose out of provocation by the UN secretary general, Kofi Annan, to 50 CEOs of large financial institutions, on how to integrate social, environmental and governance factors in the capital market. The document proposed a new way for investors and financial institutions to evaluate companies when investing. In practice, it was the suggestion of a new booklet of rules and recommendations so that issues related to ESG could be taken into account. The movement instigated in 2006 the emergence of the Principles for Responsible Investment (PRI), a global network of institutional investors supported by the UN, which disseminated the concept of responsible investment, taking sustainability into account.
How is the theme treated worldwide?
Worldwide, especially in Europe and Japan, the ESG theme has been effectively discussed for at least two decades. In the European Union, as of that year, a sustainable finance classification system was created for funds that wish to be named ESG. Those who do not meet the pre-established criteria, shall not be contemplated with the green taxonomy. According to data from the Global Sustainable Investment Alliance (2020), the responsible investment industry has reached today USD 31 trillion worldwide, which represents 36% of the total financial assets under management.
One of the main defenders of the ESG theme is Larry Fink, president of the largest managing firms in the world, BlackRock, which has circa 8 trillion (almost six times the size of the entire Brazilian fund industry). Since at least 2016, Fink has addressed the issue of sustainability and responsible investment in interviews and in the company’s famous annual newsletters, which tend to dictate trends in the market. In 2021, BlackRock is pressuring companies to adopt zero emission targets in 2050, noting that it may abandon polluting companies’ investments.
Why are Brazilian companies incorporating the theme within their routines?
This is happening because the adoption of an ESG agenda by companies brings several positive impacts such as competitive advantages, improved reputation and image, increased dialogue with its different audiences and, especially, greater profitability. In Brazil, and worldwide, investors have realized the importance of making investments in companies that are not only profitable, but are also capable of conducting their business in a healthy manner for their audiences, for society and for the environment. A company that incorporates environmental, social and governance practices at the core of its business demonstrates not only maturity, but a more competitive economic and financial performance.
In August 2020, The New York Times highlighted how ESG Funds grew more than traditional funds on the New York Stock Exchange even during the pandemic. Since its creation, in 2005, the Corporate Sustainability Index (ISE) has delivered a profitability higher than that of the Bovespa Index – while the stock market’s total grew 223%, the ESG portfolio rose 296%¹. In addition, during the last year, circa ten investment funds based on the ESG concept were created in Brazil. We speak of an increasingly impacting movement in relation to mutual gains – the company that incorporates ESG premises wins, investors win and the society benefits from fair and lasting practices.
Are there indicators that can “measure” ESG incorporation by companies?
Yes, some rating agencies have developed ESG rating systems and are rendering their reports available to clients in the financial market. First, they analyze the company’s business area so to understand what are the most relevant factors in its activity. Then, they map the presence or absence of guidelines and practices that relate to ESG themes, taking into account that geographic aspects can also influence.
MSCI and Sustainalytics are some of these rating agencies. MSCI has 8,500 companies in its database and its proposed classification ranges from CCC to AAA. The closer to CCC, the more distant the company is from the ESG criteria. The closer to AAA, the more advanced. Sustainalytics, on the other hand, with a database of 12 thousand registered companies, proposes to classify a company from 0 to 100. The higher the number, the better the company’s management in relation to ESG measures.
It is important to mention, although these ESG rating agencies have their own methodologies to compose their classification, there is no consensus in the market on which is the best framework currently applied. In addition, as this classification system is not mandatory and the term ESG is not a seal or title granted by an institution, companies themselves can declare whether they adopt actions with an ESG character in their sustainability reports, and may, in some cases, interpret that which suits them.
With this ESG trend, what changes in practice for the final consumer?
When purchasing from a company that adopts ESG criteria in its business, the consumer values, above all, the social and environmental awareness of a brand. It is as if this consumer supports companies that, in fact, act with concrete actions in relation to value and security in several ways. Consuming products or services of a company concerned with acting on ESG parameters is to support, in a certain way, environmental and social causes, such as a fair supply chain (without slave or child labor involved), the use of tax incentive laws supporting development of environments that are not always so economically favored, the minimal use of extraction of natural resources and responsibility for the residues generated in production, in addition to encouraging an ethical company to conduct its business and satisfy society.