Is ESG proof of the excellent companies?
●The investment perspective has shifted from “Do you make a profit?” to “Are you ESG conscious?”.
U.S. President Trump has withdrawn from the Paris agreement and has repeatedly made skeptical remarks about global warming. “Whatever succeeded to Global Warming? (By the way, what happened to global warming?)” he tweeted, referring to what is likely to be the coldest Thanksgiving in 100 years.
Soon after, however, a report compiled by the U.S. National Oceanic and Atmospheric Administration (NOAA) and other organizations stated that global warming was steadily progressing and that the United States could suffer economic losses of up to several 10 trillion yen. This highlights the gap between the president’s words and deeds, which cannot be said to be logical.
Today, there is much talk of “ESG” in which companies are asked about the relationship between environmental issues such as global warming and various social issues and economic activities.
ESG stands for “Environment” (environment), “society” (social), and “Governance” (governance). Investors are increasingly investing in companies that operate with ESG in mind, rather than in short-term profits.
In the area of the environment, specific themes include the prevention of global warming through decarbonization and the use of renewable energy, and the conservation of biodiversity. In the area of society, specific themes include women’s participation in society, human rights, and contributions to local communities. In the area of governance, specific themes include legal compliance and the role of outside directors.
In the past, it was the norm to allocate funds to investment destinations that would provide greater returns in the short term. However, the ESG investment concept calls for “Contribute to solving social issues and invest in companies that are sound and capable of sustainable growth as an organization” in anticipation of the next 10 years.
None of them are easy to deal with, but if you look at them from a different perspective, they can be an opportunity. After all, ESG investment worldwide stands at a whopping $22.89 trillion (Approximately \2,500,000,000,000,000) , and some estimates put it at about 30% of global investment, with unstoppable momentum. A number of international companies have announced their participation in ESG investments, including Japan’s Government Pension Investment Fund (GPIF), European and U.S. pension funds with the world’s largest assets under management, and major insurance companies such as ING and Allianz.
The ESG has such a large presence, but in the United States and Europe, the “SRI (socially responsible investment)” method of excluding companies that handle weapons or alcohol from investment has been firmly established. Since the 1992 Earth Summit, environmental issues have been linked to investment.
Then, in 2006, then-UN Secretary-General Kofi Annan proposed the idea that “PRI (Principles for Responsible Investment = Principles for Responsible Investment)”. The PRI asked investors to base their decisions on longer-term social and environmental impacts and sustainability rather than quarterly financial information.
Since then, the PRI has been embraced by many institutional investors, financial institutions and corporations, with an aggregate investment portfolio of almost $9 trillion (Approximately \995 trillion). The ESG investment further embodies this PRI.
●ESG Investments Affect Entire Supply Chain
But it’s not all good things. While there is a possibility of attracting new investment, if the ESG perspective becomes more important in the future, companies that fail to respond quickly may face difficulty in raising funds or may be excluded from orders, which could jeopardize corporate activities.
The impact is not limited to the target company. Companies that receive ESG investment must keep an eye on their entire supply chain for environmental problems, discrimination, and poor working conditions.
The Acsa Group, a major French insurance and financial institution, has announced an environmental investment of 1.2 billion euros (Approximately \150 billion) by 2020. At the same time, we declared a “Divestment (divestment)” to increase investments in companies that rely on coal for more than 30% of their sales.
Although there is a growing trend for organizations with investment policies like AXA around the world, ESG investment in Japan has only just begun. Japan accounts for only about 3.4% of global ESG investment, and is said to be 10 years behind the global trend. Investment in decarbonization, a major theme of ESG investment, is also limited, and new coal-fired power plants are planned.
Will Japan be left behind 10 years behind? Not really. By choosing products from companies that are actively involved in ESG, we can be indirectly involved in and actively support their efforts.