As climate change and human rights issues have become ever more pressing, the public has become increasingly aware of sustainable development. Some businesses have joined the trend and formulated sustainability roadmaps for the next five to 10 years, to implement a range of activities, from procuring raw materials, reducing water and energy wastage and reducing greenhouse gases to improving working conditions and labor management.
An increasing number of investors are looking at the effects of sustainability on their financial assets and shifting their attention to so-called “environmental, social and governance” (ESG) investments. Meanwhile, many companies that are oriented toward green technology and focused on human rights, including ensuring safe and secure working conditions, have outperformed the market average amid the COVID-19 pandemic.
Companies with sustainable development strategies focus on improving their business model and product lifecycle. In some cases, companies aim to address these issues along their entire supply chain.
As a result, investment in sustainability, or ESG investing, leads to a fundamental shift in the companies’ business management, corporate culture, financial strength and investment valuation, making them more likely to address their operations’ effect on environmental and socio-economic issues.
Some ESG funds have performed well, despite market volatility, and in some cases they have outperformed their traditional index-based counterparts.
Firms that are well prepared for ESG shocks have demonstrated the ability to mitigate downside risks, and companies with sound ESG profiles tend to attract investors with better performance.
Nevertheless, skepticism also accumulates regarding whether companies have honored their sustainability pledges and whether ESG fund managers have exercised influence on behalf of their investors over issues essential to long-term sustainability.
As of the end of May, 14 securities firms in Taiwan were offering 21 ESG funds, with combined assets under management of NT$110.2 billion (US$3.94 billion). Since then, the Financial Supervisory Commission has approved five more funds, which are likely to enter the market soon.
Early this month, the commission said that ESG funds would be held to stricter disclosure requirements. Some managers had launched funds without detailing how the portfolios or investment strategies lined up with sustainability goals, and the commission said it would give them six months to ensure that their actions matched their rhetoric. The move came after the commission last month said that, from next year, publicly listed companies must disclose their electricity and water consumption, as well as waste management, to allow investors to evaluate their ESG performance.
The stricter requirements are needed, given that investors are demanding that companies’ ESG profiles meet their expectations, and considering that some firms continue to abuse the environment or their workers even though they have pledged to stop doing so.
Managers of ESG funds can make a tremendous difference by using their shareholder power to influence corporate behavior, while delivering long-term competitive returns and positive social change to investors.
As ESG investing looks at risks and opportunities through the lens of sustainability, rather than business models and development strategies, companies must follow through on their pledges and regulators must effectively oversee the funds.
Some companies make ESG promises just for public relations, rather than to gain a competitive advantage and differentiate themselves from their rivals. Such tricks must come with a regulatory price — and sooner rather than later.
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