ESG investment – the new hotspot
While investing in Environmental Social and Governance (ESG) has become more popular over the last 20 years; to the millennial generation, it's almost a prerequisite.
Investors such as Tundra Fonder emphasises on ESG standards and Socially Responsible Investing (SRI). This has prompted the Colombo Stock Exchange (CSE) to promote local listed firms to adopt ESG factors in a bid to attract such foreign investors.
Tundra has US$ 150 million in its Frontier Sustainability Fund, which has invested $ 20 million (12 per cent) of the fund portfolio in Sri Lanka. SRI is growing at over 16.5 per cent a year, over twice the 8 per cent rate for other funds, according to statistics.
The CSE recently launched a manual - Communicating Sustainability: 'Six Recommendations for Listed Companies' to assist listed companies in addressing environmental, social and governance factors in their capital market communication.
Sustainable investors aim for strong financial performance, but also believe that these investments should be used to contribute to advancements in social, environmental and governance practices. They may actively seek out investments – such as community development loan funds or lean tech portfolios – that are likely to provide important societal or environmental benefits. Some investors embrace SRI strategies to handle risk and fulfil fiduciary duties; they review ESG criteria to judge the quality of management and the likely resilience of their portfolio companies in dealing with future challenges. Some are seeking financial outperformance over the long term. A growing body of academic research shows a strong link between ESG and financial performance, Tundra Fonder AB Founder/CIO Mattias Martinsson told the Business Times when he was in Colombo recently.
He said that 37 per cent of asset growth during 2012-2016 came from SRI assets and that SRI assets grew by twice the rate of conventional assets during 20122016. “The growth will accelerate.” He added that since autumn 2016 all Tundra's funds are screened for violations of international conventions (guidelines from UN Global Compact, OECD, and ILO) and they focus high on this aspect.
Tundra has an in-house ESG research team and external screening consultant. There're two dedicated analysts working exclusively with ESG analysis where they communicate with all portfolio companies and focus on a systematic, scientific and thematic approach.
Analysts say that foreign investment can be driven by ESG and that specifies the underlying mechanism of foreign investors' stock picking behaviour. They say that ESG compliant firms can attract foreign investment.
According to the Global Sustainable Investment Alliance (GSIA), assets valuing over US$ 21.4 trillion have incorporated ESG concerns into their investment selection and management globally, representing 30.2 percent of the total assets under management.
The CSE guide is meant to help companies on how to approach the topic of sustainability when they incorporate it into their capital market communication. CSE in collaboration with the Global Reporting Initiative (GRI) hosted a workshop on Sustainability Reporting and Corporate Social Responsibility last Thursday.
The event, which was exclusive to representatives of companies listed on the CSE, addressed the business case for adopting sustainable business practices in listed entities and provide insight into monitoring, managing and communicating sustainability related performance effectively.