In recent years we've seen increasing recognition being given to the notion of sustainable investing. This trend is evidenced by the adoption of ESG (environmental, social and governance) considerations by fund managers and investors when investing in companies. The growth in ESG-labelled investments has been matched with the adoption of ESG-related regulations in some jurisdictions and by some international agencies.
The trend toward ESG investing has been amplified during the Covid-19 pandemic, as people everywhere take stock of our current circumstances. When the crisis has passed, are we going to be satisfied with reverting to old ways of doing business, or will the markets look for ways to profitably invest that are better for our planet, our societies and future generations? If the latter, the offshore jurisdictions where Appleby operates are uniquely well-placed to leverage their inherent flexibility and commercial responsiveness to promote ESG investing.
In this article, we examine these trends from the perspective of our Appleby offices around the world. We also discuss recent developments in ESG regulation and how we can assist you with navigating the ESG regulatory environment.
WHAT IS ESG?
ESG, often linked to sustainable and/or impact investing, is a term used in capital markets and by investors to evaluate the sustainability and ethical impact of a company. It comprises environmental considerations such as climate change, social considerations that include diversity and pay equality and governance considerations which extend to executive compensation and employee relations. The prominence of ESG considerations in the financial markets – particularly environmental factors – is becoming increasing apparent, with oil giant BP announcing recently that it intends to cut its carbon emissions to net zero by 2050. It also plans to increase the proportion of its investment into non-oil and gas business (among other things).
Initially feared as potentially resulting in lower returns on investments, ESG focused investments appear to have performed well in recent times, outperforming some of their traditional non-ESG counterparts. Take the S&P500 ESG index for example: this stock market index, which tracks large US companies with high ESG ratings, outperformed its traditional counterpart the S&P500 index in the first quarter of 2020, proving that sustainable investing can be just as profitable as traditional investing.
THE COVID-19 FACTOR
Covid-19 has helped to put issues and concerns about sustainability firmly on the political agenda. People everywhere took note of the changes in air quality and the reported resurgence in wildlife as a result of restrictions on the movement of people due to enforced lockdowns. These experiences, difficult as they have been, have had the unexpected positive side effect of putting sustainability on corporate agendas as well. As noted above, where the returns are favourable and ESG funds are out-performing traditional indices, more people will take note. This may lead to an increase in:
- commissioning of reviews of the wider environmental impact assessment in sectors where this has traditionally not been undertaken;
- giving non-financial reporting within annual financial statements such as a voluntary section on ESG and Corporate Social Responsibility provisions;
- undertaking supply chain environmental and sustainability assessments of the underlying investments and the environmental impact of service providers;
- seeking additional due diligence in acquisitions or reorganisations to give due attention to ESG and sustainability factors beyond financial impact; and
- consideration to appropriate and genuine performance indicators, ISO criteria and marks and branding.
THE EU TAXONOMY REGULATION
As mentioned earlier, the growth in ESG-labelled investments has seen an adoption of ESG related laws and regulations by various international regulators. Most recently the EU introduced Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment (the Taxonomy Regulation) which came into effect on 12 July 2020. The framework established by the Taxonomy Regulation helps to assess how sustainable (or 'green') an economic activity is on a scientific, comparable basis. This in turn allows for the assessment of a particular company or portfolio on its ESG credentials. The Taxonomy Regulation lists specific environmental objectives that the economic activities must contribute to in order to be considered environmentally sustainable.
Of greater significance are the increased disclosure obligations that will apply to financial market participants under the Taxonomy Regulation. It will require financial market participants to disclose information on how, and to what extent, the underlying financial product qualifies as environmentally sustainable under the Taxonomy Regulation. It will also require an express negative disclosure where a financial product does not take into account the EU criteria for environmentally sustainable investments.
Concerns have been raised about the "greenwashing" of funds and products. The term refers to the practice of marketing investments and products to appear more sustainable and ethical than they really are. Until recently, there was a lack of consistency globally in terms of governmental and regulatory responses to ESG with some companies focusing on environmental issues more than on the social or governance aspects. The Taxonomy Regulation will help to prevent this as it becomes a benchmark standards indicator.
THE APPLEBY PERSPECTIVE
The jurisdictions in which Appleby operates are setting a new pace in recognition of the importance of ESG investing for international investors. Below we describe some of the developments in our key jurisdictions.
Originally published 21 Aug 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.