In your hands, lies choice
In choice, lies our future
sustainability
a guide to the finance behind
it's
all
about
the
green
module 1
Understanding Sustainability
We only have one planet, one home. Resources are not infinite. To address this, society has developed the concept of “sustainability”: the practice of using resources to meet present needs without compromising the ability of future generations to do so.
In the grand scheme of things, this concept is very new, in fact, it has only become popular in the last few decades because we have started to understand the consequences of centuries of unconscious practices.
a brief timeline
of the term
"sustainability"
The ESG Framework
In 2004, the United Nations acknowledged the term Environmental, Social and Governance, often abbreviated as ESG. The ESG is a well-rounded framework that allows investors to assess a company's commitment to those impacted by its practices and quantity their efforts towards sustainability. (A thorough analysis will be performed later in this section)
Image retrieved from the United Nations
Goals for people, for the Planet
The future is promising, but before we reach prosperity, we must face reality. Both our species and our home, planet Earth, face important challenges. According to the United Nations, these are the most important calls to action we must answer to:
Notice how many of these goals overlap with ESG:
The environment (6,7, 9, 11, 12, 13, 14, 15)
Society (1, 2, 3, 4, 5, 8, 10, 12, 16)
Governance (5, 8, 9, 11, 12, 13, 16, 17)
The Power of Impact Investing
Capital and choice grant investors the ability to exert influence over the actions of the worlds' largest companies. Why not seize this opportunity to set a new direction for our planet?
The sheer magnitude of capital being manipulated in the market serves as a reflection of its potential to reshape our timeline towards prosperity. As investors we not only have an ability to do so, but a responsibility to our community and our planet.
think about it...
"e"
stands for
environment
module 2
Climate Change
Climate change is a natural process that our planet goes through, however “there is unequivocal evidence that Earth is warming at an unprecedented rate” (NASA).
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the science behind climate change
The sun’s heat rays enter Earth’s atmosphere and bounce off the surface of the planet, returning to space. The cumulative liberation of greenhouse gasses, such as (carbon dioxide, methane, nitrous oxide, ozone, etc) has formed a layer in the atmosphere that absorbs and re-radiates heat into earth, preventing it from leaving, effectively increasing Earth’s temperature.
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Climate change made Australia’s wildfires 30% more frequent
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Venice, Italy is sinking by 0.2 centimeters per year.
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Earth’s average temperature has increased by 1.1 degrees celsius (33.98 fahrenheit) since the first industrial revolution
examples of present consequences
It is only natural to discover how much do industries contribute
As you can see, energy production accounts for approximately 3/4ths of total emissions. In fact, coal and oil companies are the greatest polluters out there. Just the top 10 oil & coal companies have contributed 34.26 percent of global emissions.
Only
Water depletion
Water depletion has significantly increased due to factors such as population growth, evaporation, and deforestation. However, a striking statistic from Conservation Gateway in 2018 reveals that "nearly two-thirds of all water consumption goes into producing ingredients for corporate supply chains." Unfortunately, the rate at which drinking water replenishes cannot keep pace with its usage.
3%
Of Earth's water is suitable for drinking
Renewable Energy and Clean Technologies
As shown by the previous module, energy plays a prominent role in the grand scheme of things. Fortunately, there are alternatives like renewable energy (which is sustainable and does not pollute the environment) and low carbon sources.
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contributors and consequences
Drinking water, agriculture, power generation, manufacturing, fashion, and chemical industries have long been identified as main contributors to water depletion. While we must take preventive measures for the future, it's important to acknowledge that these issues are already occurring. As of July 2023, more than half of Uruguay's 3.5 million citizens lacked access to tap water suitable for drinking. This pressing matter underscores the significance of water management, which has been integrated into the Environmental, Social, and Governance (ESG) framework's environmental section.
sources of energy
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Each energy source has unique advantages and disadvantages to it.
The most important ones include: solar power, wind power, hydropower, nuclear energy (yes, you read that correctly! Despite its fame, nuclear energy is the second lowest carbon energy source out there), etc. The majority of energy sources are bound by their geographical location. For instance, solar power would not be effective in places far from the equator. However, some work regardless, such as nuclear power plants.
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a seamless transition...
​Transitioning to clean energies has an elevated upfront cost. Stakeholders can encourage oil companies to transition to clean energies. Surely, there are several challenges that renewables must overcome, nevertheless, with increased funding and interest from society, change for the better awaits.
as conscious investors...
As environmentally conscious investors, we possess the capacity to encourage the adoption of water-friendly practices and discourage excessive consumption. By closely monitoring our utilization of natural resources, we can proactively address these challenges and invest consciously. As of 2020, 37% of the total energy production on our planet came from low carbon sources. With more and more environment conscious investors, we can push that number even higher.
"s"
stands for
social
module 3
Parameters
Currently, the factors that comprise it are quite ambiguous and ambitious. Consequent to that, quantifying this factor into investment decisions has become quite challenge, according to experts. Currently there is a lot of bias towards quantifying negative social contributions rather than positive ones. This category needs a major restructure in order to become standardized. However the following are categories that can help you better understand the main factors that the social component entails and currently measures.
Labor and Human Rights
Social considerations with ESG try to understand and measure a business’s impact on its members, being both internal (workforce) or external (customers and politics). The S factor seeks to minimize possible risk coming from these factors. Labor and human rights laws were recognized by the United Nations in 1919 and 1948, respectively. Businesses that follow these laws thoroughly are unlikely to face legal consequences, damage to their reputation, limited access to markets and high turnover rates, among many others. Thus it is not only societies interest, but also influential stakeholders' like investors to promote a correct implementation of these laws.
Safety and Protection
Quality and privacy are also strong contributors to the social aspect of ESG. It is in the investors interest that companies adopt intelligent practices and policies that address these scenarios. Transparency is a key factor that investors must look for in their portfolios.
Diversity, Equity and Compensation
This Social subcategory encompasses three critical factors. To begin with, it is imperative to establish fair compensation that enables the workforce to maintain a high quality of life, including providing for their families, owning a home, and making occasional purchases. In addition, no differences in pay and authority must be attributed to gender, race or religious affiliation. Furthermore, it is crucial to be mindful of and address the pay gap between regular employees and executives. These factors not only promote security and stability for the workforce but also contribute to maintaining a positive public image among consumers, prospective employees, and investors.
"G"
stands for
governance
module 4
Parameters
Governance in the context of ESG refers to the set of rules, practices, and processes by which a company is directed and controlled. The governance structure involves balancing the interests of a company's many stakeholders. The effectiveness of this structure directly impacts a company’s ability to achieve long-term sustainability and ethical operations.
Anti-Corruption and Ethics
Corruption and unethical practices can significantly undermine a company’s reputation and financial stability. The importance of transparency in operations, adherence to legal standards, and the establishment of clear ethical guidelines to prevent bribery, corruption, and other unethical behaviors are standards that company's need to monitor and uphold. Additionally, this section calls for mechanisms to report and deal with unethical practices.
Executive Incentive Structures
Executive incentive structures are crucial in aligning corporate goals with long-term sustainability. This involves designing compensation methods, such as bonuses and stock options, to motivate executives to prioritize environmental and social responsibilities alongside profitability. It examines how these incentives influence decision-making and risk management, promoting a culture of responsible governance. Are employees incentivized to do good?
Corporate Governance and Board
​The governance and board aspect delves into the structure and composition of a company's board of directors. It involves ensuring board diversity and independence, which are essential for effective governance. The role of the board in overseeing the company's ESG strategy, risk management, and adherence to governance standards is central. This component also explores the specific roles of board committees in addressing governance issues like audit, risk management, and sustainability.
ESG,
A controversial
metric
module 5
Impact on investing performance
Isolating ESG factors' direct impact on investment performance is challenging. Despite this, emerging data suggests a positive correlation. For instance, a study found that companies with high ESG ratings outperformed the market average by 3-5% over the past decade. Additionally, during economic downturns, ESG-focused funds have shown a 20% higher resilience compared to traditional funds. These trends indicate that while quantifying ESG's exact impact is complex, its influence on long-term investment stability and growth is evident
mandatory vs voluntary disclosure
Currently, disclosing ESG audits is a voluntary practice. Despite increasing pressure from stakeholders, companies retain the discretion to decide whether or not to adhere to these standards. This raises an important question: Should this compliance be merely optional?
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As impact investors, we possess significant leverage to steer companies towards sustainable practices. By prioritizing investments in businesses that demonstrate a commitment to ESG principles, we can send a clear message about the market's expectations. We can advocate for stricter regulatory frameworks that mandate ESG disclosures, thus, leveling the playing field and ensuring that sustainability becomes part of companies vision, rather than an optional add-on.
module 6
ESG,
A Real-World Application
MSCI Ratings
MSCI ratings provide a quantitative measure of a company's environmental, social, and governance (ESG) performance, using a scale from AAA (leader) to CCC (laggard). These ratings enable investors to objectively compare the ESG risks and practices of various companies. MSCI ratings are essential for those aiming to invest in sustainable and ethically responsible businesses. They pinpoint investment choices that align with personal values on the aspects measured by ESG. We encourage you to check the ESG ratings of your favorite companies in the official MSCI website:
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https://www.msci.com/our-solutions/esg-investing/esg-ratings-climate-search-tool
Incorporating ESG into our decisions
Incorporating ESG considerations into our decision-making processes is essential in today's rapidly evolving business landscape. By taking into account these factors, we ensure that our choices align with the planet. But beyond adhering to ethical standards, ESG metrics serve as valuable indicators of future business opportunities or potential challenges.
Becoming an ESG Advocate
Your voice and actions can drive change, promoting sustainable and ethical practices around our world. Start small, think big, and be a part of shaping a responsible future. Join the movement for a better tomorrow – every effort counts!
