ESG investing advocated by the United Nations
Recently, the SDGs, which set out the direction the world should take and 17 goals, have become widely known to the public, and activities to achieve the goals have also been expanding.
At the same time, interest in ESG investing is also growing. The practice of ESG investing started from the concept that companies have Corporate Social Responsibility (CSR).
In other words, CSR is positioned in line with the SDGs, which set goals and targets to strive for. Consequently, we can say ESG investing is intended to encourage and check specific corporate activities for that purpose.
ESG refers a non-financial measurement system to evaluate the corporate activities, by using Environmental, Social and Governance factors.
In the Environment field, emissions of greenhouse gases such as CO2, waste and environmental pollution, and the way of using water resources are underlying indicators.
In the Society field, such as employees’ working conditions (health, safety, gender equality, etc.), slavery and child labor, and relationship with local communities are focused.
In the Governance field, such as relationship with shareholders, business ethics, composition of the board, corporate disclosure, and relationship with local communities should be checked.
Listed companies disclose their ESG initiatives by integrated reports and sustainability reports.
ESG rating agencies score companies’ ESG initiatives. For example, MSCI in the United States and FTSE in the United Kingdom are well known, and in Japan, Toyo Keizai conducts ESG assessments.
ESG investing will be determined based on information from the integrated reports, sustainability reports and the ESG rating agencies.
The purpose of investment is to generate returns. Therefore, it is a matter of course to check business results and financial conditions of the investee company. In addition to that, from ESG perspectives, the United Nations announced and advocated PRI (Principles for Responsible Investment) in 2006.
In the great movement of SDGs, it is intended to clarify the responsibilities of companies and to drive more money to the companies that fulfill those responsibilities. In short, it adds green color to the money that flow into those companies.
At first, the PRI proposal was supported and signed by fewer than 200 investment institutions worldwide. Now it has been signed by about 5,000 investment institutions. In Japan, it has been signed by about 300 institutions, including the Government Pension Investment Fund (GPIF), the largest investment institution in Japan.
The benefits of ESG management
On the other hand, companies are required to have ESG in mind, to conduct so-called ESG management. It is not enough for companies to create profits, they have to do contributions to society and environment.
Of course, ESG management will increase companies’ costs.
So, if you ask whether ESG management is burdensome and disadvantageous to companies, it is not necessarily true.
First, ESG investing is growing worldwide, it is difficult for companies lacking social responsibility to make money flow into them. To sustain and grow a company, ESG management will become an essential issue.
Actually, it is a well-known fact that even large and long-established companies representing Japan fell into decline because they lacked Governance.
Issues related to Environment and Society are also important. In Japan, pollution and vehicle exhaust emissions became such major social problems in the 1960s and 1970s that Japanese people are sensitive to environmental issues. The urgent issue of reducing CO2 emissions has been attracting increasing attention in recent years.
For example, major natural disasters have occurred nationwide every year. If this is due to climate change caused by greenhouse gases, it is obvious that public and private sectors have to work together in action. We need more investments to companies that are committed to addressing the issue.
It is also important for companies to address the gender wage gap, increase the number of women in managerial positions, take care of employees’ health, and reduce work-related injuries.
Recently, these issues have been quantified so that you can see whether or not they are improving. It is very important for companies to increase their productivity. Accordingly, it is essential that these figures be used to improve the working environment.
Not only employees, but also business partners, consumers, and local communities are stakeholders. Maintaining good relationships with these stakeholders is also an essential factor for a company to sustain itself and grow.
Supply chains are becoming more globalized, if overseas business partners are engaged in, for example, human rights infringement or environmental pollution, the company itself will also be damaged. Management of such risks with ESG mind is also very important.
In other words, ESG management not only makes investments beneficial, but also helps the company control risks and prevent problems. From a long-term perspective, this will stabilize corporate performance, leading to increased profits.
ESG management will be a good opportunity to make corporate reform and innovation.
ESG management generates new ideas
ESG management is a challenge for companies around the world. In China, for example, there is a growing interest in environmental issues.
That is because air pollution, especially in big cities, was a major social problem in China when people were walking in the street, they had difficulty breathing and eyes hurt.
Therefore, Chinese government has restricted the use of private cars and the operation of factories and has promoted tree planting in the suburbs. As a result, air quality has improved significantly.
Along with such efforts, China has been actively working to regulate CO2 emissions because global warming and climate change have become global issues.
Since Japan is ahead of other countries in energy-saving technologies and environment-friendly technologies, I think it is easy for Japan to cooperate with China in this field.
In fact, major Japanese automakers have established research centers in China where it develops energy-efficient vehicles suitable for Chinese social situation.
In addition, large-scale solar and wind power generation facilities are being built in the desert area of western China to introduce renewable energy.
The problem is that power loss occurs when electricity generated in the desert area is transferred to distant eastern metropolises. Thus, interest in smart grid technology is growing in China.
On the other hand, there are plans to build facilities that consume a lot of electricity, including a data center, in the desert area. Some Japanese companies have interest in this idea because they can operate their facilities with low electricity costs.
The point is, if you think from the perspectives of SDGs and ESG, you will be able to create new business opportunities.
There are more familiar innovations. For example, overpackaging of products has been an issue in Japan for a long time, and it has not been improved yet. This is because people prefer the status quo if there are no big troubles.
However, if it is for the sake of SDGs and ESG, then both companies and consumers are likely to agree to reduce overpackaging.
In short, it is a good opportunity to change the common perception that a first-class product needs nice packaging to one that a first-class product has simple packaging.
In the conventional way of thinking, ESG management tends to be regarded as a burden for companies. But now, ESG management can be regarded as a trigger for risk management and innovation. ESG management will bring sustainability and growth to the company.
If you see things around you from the perspectives of SDGs and ESG, you may be able to find wastes and opportunities that you did not care.
* The information contained herein is current as of October 2022.
* The contents of articles on Meiji.net are based on the personal ideas and opinions of the author and do not indicate the official opinion of Meiji University.
* I work to achieve SDGs related to the educational and research themes that I am currently engaged in.
Information noted in the articles and videos, such as positions and affiliations, are current at the time of production.