Environmental, social and governance investing has plenty of challenges, such as a lack of knowledge, a lack of regulation and often conflicting data on companies.
It also has plenty of opportunities, such as a rising cohort of younger investors interested in sustainability, greater access to online tools and information, and the prospect of strong adviser-client relationships.
But what does ESG need to make sure that it is a long-term, sustainable investment philosophy, and not just a popular fad for the short term?
For Ashley Hamilton Claxton, head of sustainability at Royal London Asset Management, behavioural change has to be one of the key priorities for encouraging and solidifying ESG investing, as much as it is for combating climate change.
She says: “We cannot solve the climate crisis without a sociopolitical solution. It’s about behavioural change and incentives, not simply environmental and technical challenges.”
Baillie Gifford partner Stuart Dunbar agrees. He explains: “Social pressure and changes in how we personally interact and behave will play a role, for example potentially reducing the need and desire for travel, and for carbon and water-intensive farming.”
Younger generations
From Dunbar’s perspective, these behavioural changes are led by a ‘partnership of hope’ between the younger generations of today – emerging investors and stakeholders – and the companies that supply and serve our society.
He says this partnership will result in companies actively making a difference to their products and services, not just in terms of pricing but also their ESG impact.
Dunbar explains: “A generation that has grown up with an understanding of the realities of climate change is maturing, and becoming more significant as a driving source in consumer spending.
“Companies that are deemed to be acting responsibly on social and environmental issues will have stronger brands than those that don’t.”
His comments have been backed up by a new survey from law firm Gowling WLG.
Carried out among more than 1,000 Generation Zs (16-25 year olds), the ‘Tomorrow’s World’ study warned of the danger of not properly engaging with Gen Z on ESG.
The report revealed that, as citizens and community members, Gen Z is more aware, more influential, and more likely to take action on ESG issues than any other generation.
The report found:
- Gen Z (16–25 year olds) are hyper aware of corporate ESG issues: 87 per cent said they consider suppliers when deciding how ethical a business is.
- 3 in 5 Gen Zs will protest about businesses’ perceived ESG failings on social media and on the streets.
- Gen Z demands high financial penalties for environmental infringements: 28 per cent said offenders should face fines of 11–20 per cent of their turnover; 20 per cent said that should rise to 30 per cent.
But companies cannot simply turn green and pass the costs of doing that onto the consumers. Dunbar emphasises that affordability is key, and companies that “externalise the long-term costs” onto society will “be penalised” in how consumers – and investors – make decisions with their money.
In order for companies to thrive in the future, they will need to appeal to the emerging, ESG-savvy generations of spenders and savers. Therefore, without a proper, long-term approach to sustainability, the companies themselves cannot sustain their own profit growth.
