ESG Investment Strategies: Have you got your money on the right horse?

Ethical Markets Global Citizen

Growing environmental challenges and informed customer choice to have a material impact in the response of businesses and the future of financial risk analysis – says Forum for the Future.

In a recent interview with Finance IQ, Alice Chapple, Director for Sustainable Financial Markets at the Forum for the Future, discussed the emerging environmental and social trends and how these are affecting, in a material way, investment decisions.

She identifies three key trends which will likely affect the future of financial risk analysis: One is growing environmental challenges. The second is the response of leading businesses, which is very interesting. And thirdly, is a sort of increasing evidence of loss.

According to Alice, there is a growing recognition that issues such as climate change, resource constraints – and we’re talking about water, oil, or healthy soil, natural fisheries as so on – are becoming more critical as the world population is expanding and is becoming wealthier. For example, there might be difference in the way the supply chain is able to deliver certain goods and services, or consumers might choose brands with a better reputation for managing ESG
factors.

Some businesses are already responding to this challenge: for example, Unilever’s leadership is arguing that investors can achieve the highest and the least volatile financial returns if they avoid chasing short-term shareholder value, and instead, build up strong capital in social and human and natural terms. And they’re not doing this for social responsibility; they’re doing it because they really see that the world is changing and that they need to have products and services they can deliver.

The fact is that risks are being felt around ESG issues which can have catastrophic results if ignored – e.g. BP Oil Spill. Alice is of the opinion that financial analysts gradually will realise that many of these issues are becoming increasingly material.

All of this leads on to how fundamentally important it will be for investment firms to communicate their ESG initiatives to their investors, and in turn increase their confidence: companies that do have the best strategies for responding to these risks and opportunities will be good investment prospects, and won’t create the volatility and the scary risks which investors clearly don’t want to have in their portfolio.

Alice Chapple will be addressing delegates at the upcoming ESG Strategies for the Sustainable Investor, taking place 18 – 20 October 2010 in Brussels. Her panel discussion on day two of the conference, “Communicating ESG Initiatives To Stakeholders” will expand on the importance of conveying how ESG criteria are being incorporated into investment strategy to investors, and Forum for the Future’s recently developed tool kit designed for fund managers in developing countries to encourage them to embed sustainability into their decision-making on investments.