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Jarrel De Matas - Resilience and Investment Profitability
The commonsense of adopting an ESG approach to business
by Jarrel De Matas
“Adhering to an ESG framework means you are future-proofing your business”~ Javier Rodríguez Soler
2020 was a year of disruption. Between the COVID-19 pandemic affecting local and global economics, a racial reckoning in the US that caused the world to take note of diversity, inclusion, and equity, and the exacerbated climate crisis which is no longer changing, but has changed, it’s safe to say that 2020 taught us to do things differently. Although the pandemic may not have created the current economic downturn, it certainly intensified the effects of a downward spiraling global economy. Trinidad and Tobago’s energy sector, for example, was already headed for an economic downturn as signaled by the consistently plummeting price of oil and natural gas from 2018 onwards.
In 2018 BC (Before COVID), Nouriel Roubini and Brunello Rosa predicted that “by 2020, the conditions will be ripe for a financial crisis, followed by a global recession” (The Guardian). Roubini and Rosa did not predict the pandemic, however, which served to exacerbate predictions of a recession to the extent where, according to a World Bank report, the global economy experienced the most severe economic collapse since the Second World War.
The sharp economic downturn compelled the corporate world to pivot their operational strategies away from traditional investment strategies and toward more pressing and sustainable issues. Enter the ESG approach. The Environment, Social, and Governance (ESG) approach to business and finance management places data related to environmental, societal, and governance policies at the forefront of investment strategies. Integrating ESG criteria
into Corporate Social Responsibility (CSR) programmes takes a holistic approach to sustainability by reinforcing the view that environmental and social issues together with good governance must drive business industry.
Weathering the Covid-19 Storm
Now more than ever, with extreme levels of uncertainty caused by the COVID-19 pandemic and a worsening climate crisis, information related to a company’s carbon footprint, diversity policies, and employment practices will prove crucial to how well such a company is able to weather unexpected changes brought on by an economic downturn. As it concerns the postpandemic future where matters related to employee safety will become paramount, and as it concerns the nature of our present climate crisis where energy transitions will inform global policy, we can expect that there will be increased attention to CSR programmes that take up issues affecting the environment, society, and governance.
Investors are already placing pressure on companies to adopt ESG-related criteria. The 2020 EY Climate Change and Sustainability Services (CCaSS) Institutional Investor survey found that of the 98% of investors who assess ESG, 72% answered to carrying out a review of ESG performance – more than double the figure of 32%, as revealed in a previous iteration of the survey conducted in 2018. What we have, therefore, is a different approach to investment which is driven by environmental, social, and global governance pressures.
In addition to emphasizing a relatively new model for asset management – the ESG approach – BBVA USA President Javier Rodríguez Soler also directs attention to the ability of the model to safeguarding the future of business investment. A company’s ability to utilize effective corporate governance strategies to manage the impact of crisis brought on by changes to the environment and the society will determine their resilience over the long term. Recent S&P Global Market Intelligence reports have shown that adopting an ESG approach has become increasingly popular not only as it concerns resilience but also investment profitability.
ESG funds outperform
In the U.S. ESG funds are outperforming traditional index funds. S&P Global Market Intelligence reports that, in April 2021, 19 of the 26 ESG exchange-traded funds analysed significantly outperformed the Standard and Poor’s (S&P) 500 during the first 12 months of the COVID-19 pandemic. The ESG funds rose between 27.3% and 55% compared to the S&P 500 which increased 27.1%. This makes it a second consecutive year in which stocks based on ESG criteria have outperformed the S&P 500. In 2020, S&P Global Market Intelligence reported that all but three of the 17 ESG funds analysed posted higher returns than the S&P 500. The numbers don’t lie. The outperformance in favour of ESG investment directs attention to a shift in the way business is being done. Additionally, the consistent performance of ESG funds during and after the pandemic year of 2020 prove that ESG criteria can survive disruptions to the economy. This is a shift that not only the U.S. but the entire world is taking note of.
As the largest world asset managers take proactive measures on issues involved in ESG practices, so too must Trinidad and Tobago investment stakeholders be attuned to effective governance practices that can withstand disruptions in society and to the environment. Companies across various sectors are adopting ESG-criteria to ensure they keep up with changes in the environment, societies, and global policies. Integrating an assessment of environmental and societal disruptions along with governance policies enables companies to navigate risk thereby creating more value over the long term. Nowhere is this more urgent than the recent pandemic-exacerbated economic crisis.
Corporate T&T’s ESG commitments
In Trinidad and Tobago, Atlantic has stressed their commitment to CSR programmes that ensure their relevance during the COVID-19 pandemic and beyond by building ESG criteria into their business strategy. Such criteria, as Atlantic has proven, not only ensure corporate resilience through economic and social disruption but also align with the Sustainable Development Goals (SDG) thus ensuring their sustainability and relevance to local community building as well. Similarly, BP Trinidad and Tobago (BPTT) has demonstrated awareness of the importance of building ESG criteria into their corporate investment strategies. In keeping with the United Nations ‘Race to Zero’ campaign, BP’s environmental strategies aim to be net zero across operations including oil and gas and to reduce methane intensity in operations. As for societal responsibility, BP has pledged greater advocacy, diversity, and incentives for its global workforce. In terms of governance practices, ethics and compliance along with transparency round out BP’s core ESG criteria.
Similar to Atlantic and BPTT, Shell and NGC (The National Gas Company of Trinidad and Tobago) have also pledged commitment to ESG sustainability. Shell’s ‘Powering Progress’ initiative attempts to achieve net-zero emissions by 2050 as well as end routine flaring of gas from the assets they operate. NGC is driving the green agenda locally through its CariGreen portal, available on its website, which aims to “drive engagement, collaboration, energy education, conservation, research and development for matters related to the green agenda”. This, together with its environmental preservation procedures such as the use of Horizontal Directional Drilling to avoid cutting across natural habitat services, emphasize the NGC Group’s commitment to environmental sustainability and preservation.
Away from the energy sector, manufacturing companies such as Nestlé pride themselves on being “consistently listed in the FTSE4Good index since 2011”. Nestlé’s commitment to maintaining a high rating on the FT4SEGood index, a series of indicators designed to measure the performance of companies that demonstrate strong ESG practices, is a testament to the awareness of external issues such as environmental justice and social relevance which bear upon their corporate responsibility.
In the banking sector, Republic Financial Holdings (RFHL) maintain their position as a Caribbean financial institution committed to strengthening the region’s economies in sustainable ways. To this end, RFHL has signed on to the United Nation’s Environment Programme (UNEP) Finance Initiative’s Principles of Responsible Banking which encapsulates an ESG approach through principles of aligning business strategy to relevant national and regional frameworks, consulting with stakeholder’s to achieve society’s goals, and creating shared prosperity for current and future generations.
Staying with the banking sector, Scotiabank has built in ESGrelated policies into their banking protocols such as an attention to human rights equality, evidenced by an LGBT advertisement broadcasted in Trinidad and Tobago where LGBT laws remain conservative. As outlined in Scotiabank’s ESG Report, an inclusive society forms one of the four pillars of the ESG approach. To build an inclusive society and a more equitable future, Scotiabank has pledged customized banking for indigenous communities, increased opportunities for women-led business, and formed partnerships to fight human trafficking and child exploitation.
Whether it is the energy, manufacturing, or banking sector, the message remains the same; CSR programmes are key components of a company’s sustainability, performance, resilience, and relevance.
Tracking responsible governance
The viability and value of ESG integration into existing business strategy is rapidly becoming the norm of responsible investing. Emphasis on responsible, because as much as companies intend on making profits, there are environmental and societal needs
which they must consider in the operations. The COVID-19 pandemic has underscored the imperative to implement policies and conduct practices that are in line with ESG measures. These measures may include reducing carbon footprint, employee health and safety, board structure, etc.
While ESG integration into business strategy and operations has demonstrated profitability, measuring its impact remains a challenge in part because ESG approaches use non-financial data, such as reductions to methane production, transitions to biodegradable and recyclable material, and digital privacy and security agreements. To effectively track a company’s performance, the ESG data should be considered alongside traditional operational metrics such as stock price and Return on Assets (ROA).
As investors look to non-financial metrics for performance indicators of a company’s CSR approach, ESG-related data will increasingly drive business operations. The events of the past year have reinforced the need to consolidate the CSR approach with greater sensitivity toward issues that transcend the traditional way of doing business. Since last year, the United Kingdom, the European Union (EU) and the U.S. Government have established official ESG mandates for companies.
Strategic management procedures that can incorporate issues involving environmental, social, and governance procedures will enable that company to not only rebuild but reinvent its quality of management. To recall Soler’s point about adhering to an ESG framework, this not only future-proofs your business. It also future-proofs communities, societies, policy discussions, and the planet.
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