Author: OTCFin – otcfin.com
While the trend of ESG continues to contribute to the investment market, in this article, we’d like to provide the readers with five reasons why ESG investment will keep growing and expanding.
- First and foremost, the Environment
Currently, one of the severe global problems that humanity faces is the destruction of the environment. Global warming is the most widely spread issue among the broad umbrella of environmental issues, and the fact that the earth’s climate is changing is undeniable. How is it related to portfolio construction? Environment factors, the “E” component within “ESG”, is closely associated with the responsible and sustainable investment. Additionally, a link can be made between the company’s environmental impact and potential financial risks, making sustainable investment principles all the more compelling from a financial standpoint.
According to the Action Plan proposed by the EU in 2018, a number of changes are expected to follow in the near future. For example, sustainability reporting would be mandatory, requiring disclosure of sustainability policies and risk evaluation for investment firms. New amendments to the MiFID in the areas of suitability requirements and product governance are also expected.
- The importance of the Governance factor
The financial crisis that occurred in 2008 has become the trigger for all parties in the financial sector to recognize the importance of the cultural and moral code of conduct, but more specifically, governance. Refining corporate governance practices were no longer just the company’s duty but also the responsibility of regulatory and reporting agencies, institutional investors, asset owners, and asset managers. The infamous Volkswagen scandal that affected the company’s reputation and 260,000 car owners is an excellent example of a scandal that could have been avoided had VW simply obeyed the industry regulations. The totalitarian upper management is to blame, but the utter lack of governance was a collective factor for the misdeed that, at its time of happening, caused VW’s stocks to drop by 30%. Eventually, VW’s emission scandal led to the EU closing regulatory loopholes and manipulations that enabled companies to legally false-report the test results. Based on the past corporate failures that consequently impact both society and the economy, the importance of governance has been expressed by every party involved.
- The change in Societal Structure
According to the U.N. survey, the world population is expected to reach 9.7 billion in 2050. As the developed countries see a growing average life expectancy, sustainability is becoming more relevant to men and women of all ages. The current situation may directly impact everyone’s financial status after retirement, making ESG issues a matter at hand. One example is the increasing popularity in the green bonds market that further pushes the expansion of ESG in the overall responsible investment universe. While there are many types of different green bonds, all of them have a common goal; to contribute to society. But how can the green bond market make an impact? On a company level, issuing green bonds is a step towards sustainable management i.e., sustainable strategy, better risk management, transparency, and improved governance. In the long run, this contributes to an improvement in corporate value. Additionally, because green bonds can serve as an alternative investment, it can be an attractive investment option for risk hedging. On a stakeholder’s level, it goes without saying that green bond issuance is a perfect opportunity to see more private funds put into conservation projects. It can also be considered an ideal chance for an engagement between the company and the community, especially with the generation that is more green-minded.
In every aspect of economic and business activities, we can see a significant paradigm shift; Internet of Things, intelligent operation in capital operation, robotic advisory and consultation services are to name a few. Innovations in the tech industry, first and foremost, contribute to a significant cost reduction and greater operational efficiency, thereby shifting from the traditional, analog business operation model into digital ones. Now that tech and ESG investments are the inseparable megatrends of the year, incorporating the two factors is a key to sustainable strategy and better investment decisions.
The complexity of reporting cost the enterprises more than it should, if not appropriately controlled. At OTCFin, we think the above factors will continue to be relevant if not become the standard notions when it comes to ESG investment. Regulations change, but the quality of our service don’t.
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