Green Finance Advisor of Friends of the Earth (HK)

ESG (Environmental, Social, and Governance) factors are becoming increasingly important in investment, purchasing, and employment decisions globally. About 80% of institutional investors and consumers consider ESG, and roughly 70% of employees prefer to work for ESG-minded companies. The ESG mindset’s impact is set to grow, with ESG-influenced assets under management expected to soar 84% to reach $33.9 trillion by 2026. In addition, over $72 trillion is expected to be inherited by younger generations over the next two decades, making it the largest intergenerational wealth transfer in history.

The size of this wealth transfer makes the potential influence of ESG-directed money even more compelling, as younger generations, including Millennials and Gen Z, tend to be more focused on ESG than predecessor generations. They have especially strong views on climate change and are more likely to act on those views.

From a company’s perspective, the label “ESG” is shorthand for the management of the various environmental, social, and governance risks and opportunities they face. Management of such risks has become increasingly crucial due to rising awareness and scrutiny of these matters. In addition, there is robust evidence that good ESG management usually leads to better operational metrics such as ROE, ROA, or stock prices, particularly over the long run. These are strong justifications for companies to invest in sustainability for better corporate financial performance.

Ultimately, ESG is about creating a more sustainable and responsible business model that benefits both the company and its stakeholders. Many companies have already taken steps to integrate ESG considerations into their planning, strategy, and operations, adapting to their stakeholders’ increasingly deeply held worldviews on the responsibilities of business in society.

However, some companies have yet to fully embrace ESG practices, for a variety of reasons. Some companies may drag their feet or balk due to limited resources, but committing to

ESG should be viewed as an investment in the company’s future rather than a mere expense.

Other companies are uncertain about how to implement ESG considerations in a way that aligns with their business goals and values. They can begin implementing ESG by assessing their unique risks, opportunities, and stakeholder expectations, developing a tailored strategy that aligns with their business goals and values, integrating ESG considerations into decision-making, and regularly monitoring and reporting on their performance.

Still, other companies are simply resistant to change or may not fully appreciate the concept of ESG and how it can drive the long-term sustainability of their businesses. Engaging in a practice called “greenwashing,” where companies falsely market themselves, their products, or services as environmentally or socially responsible, is an extreme example of this resistance to change.

Greenwashing undermines investor and consumer confidence and misallocates capital intended to support pro-environmental and social outcomes. Companies that engage in greenwashing may face significant backlash from stakeholders and regulators, as this practice is viewed as deceptive and unethical. Such companies may face legal and financial liabilities, reputational degradation, and weakening of their ESG efforts. Volkswagen’s “Dieselgate” scandal is an extreme example of greenwashing and its consequences. The company had spent millions of dollars advertising cars as environmentally friendly when they were actually spewing up to 40 times the legal limit of pollution. Volkswagen’s reputation took a huge hit, and the company had to pay a total of $34.69 billion to resolve its legal and regulatory problems by March 2020.

ESG-focused companies tend to be well-governed with good controls and processes. This makes them more likely to be aware of the environmental and social risks and opportunities they face and actively address them. By planning and preparing in advance, companies can better mitigate risks, overcome challenges, and seize opportunities, ultimately enhancing their potential for long-term growth and success. These are precisely the qualities that long-term investors seek in companies.

ESG-focused companies are also better able to attract customers, especially those in the younger generations, who are seeking values-based products and services. Establishing a connection with customers that appeals to both their rational and emotional needs can increase brand loyalty and long-term support. They also have a distinct advantage in attracting and retaining talent, particularly among younger workers who are more likely to value and act on social and environmental considerations. Having an engaged and mission-aligned workforce can lead to increased employee satisfaction, reduced turnover, and improved overall performance, all of which are important to a company’s long-term success.

In summary, ESG is gaining importance globally, with a growing number of institutional investors, consumers, and employees considering ESG factors. The younger generations, who are set to inherit trillions of dollars over the next two decades, tend to be particularly focused on ESG. Companies that embrace ESG considerations and manage their environmental, social, and governance risks and opportunities are more likely to achieve better operational metrics, and attract long-term investors, values-driven customers, and mission-driven employees. However, companies that engage in greenwashing and resist the ESG shift risk losing the trust of stakeholders, facing legal and financial liabilities, and weakening their ESG efforts. Therefore, committing to ESG should be viewed as an investment in the company’s future, and companies should tailor their ESG strategies to align with their unique risks, opportunities, and stakeholder expectations.