Over the last decade, governments and businesses worldwide have started a shift towards more sustainable investing and have enacted multiple measures to promote the environmental, social, and governance ecosystem. The Covid-19 pandemic has accelerated this shift as it laid bare social and environmental shortcomings in the global economy, how businesses operate and how they speak to their customers.
Now, with businesses incorporating Environmental, Social, and Governance (ESG) metrics into their operations, the question must be asked: is it still acceptable to aim for ever greater economic growth at all costs?
GENERATING ‘POSITIVE’ PROFITS
The good news is that ESG principles provide businesses with growth opportunities – and they provide a roadmap to sustainability. Indeed, they open the door to sustained growth if implemented altruistically. To leverage the broad benefits that ESG policies present to businesses, governments and companies in the GCC should incorporate sustainability into the overall economic agenda; it must become a defining part of the GDP fabric – a central guiding force for good. This means looking at what multiple stakeholders are seeking in their daily lives: what do citizens need in a world increasingly concerned by climate change, sustainable use of materials and the treatment of human beings?
Research shows that if governments can learn what is needed to deliver good ESG outcomes, and when they holistically adopt and implement sustainable initiatives, the GCC can unlock more than $2 trillion in economic value and create more than one million jobs by 2030. The private sector – particularly the investment community – has already spearheaded sustainable investments and the outcomes are proven.
A trends report released by the Forum for Sustainable and Responsible Investment 2020 highlighted that between 2018 and 2020, total US domiciled sustainably invested assets under management, both institutional and retail, grew by 42 per cent to $17.1 trillion. This represents almost 33 per cent of the $51.4 trillion in total US assets now under professional management, according to reports. Further, as per Bloomberg Intelligence, global ESG assets are on track to exceed $53 trillion by 2025, representing more than a third of the $140.5 trillion in projected total assets under management. The accelerated growth in sustainable investing can partially be attributed to millennials who are choosing to actively precipitate change that can have a positive impact on generations to come.
A FIELD OF OPPORTUNITIES
If we consider that a great wealth transfer is already underway with wealth passing from baby boomers to the next generation, millennials are also in a unique position to engender positive long-term change through the investment and living choices that they make. That is why the sustainable investment of public funds is now becoming a global norm, presenting GCC countries with a unique opportunity to take the lead and become change-makers. Leading the charge enables GCC countries to reap the rewards of economic growth, industrial development, and innovation. In the past, sustainability has largely been the bastion of activists and select global agencies – but it is now within the reach of policymakers. There are three important pillars for state players in the GCC to consider when striving to achieve sustainable growth.
THE THREE PILLARS OF SUSTAINABLE INVESTING
Sustainable investing is a way to invest and seek returns while staying true to your values: this is as relevant to sovereign funds as it is to national infrastructure or economic investment strategies and private sector investment. For all stripes of investors, only companies that are aligned with ESG values should be invested in. For policymakers, this means understanding (and responding to) the reality that citizens no longer feel good about seeing their governments place future growth in unethical companies. Citizens are conscious of their social, environmental, and governance impact. Governments and private investors must never lose sight of this increasingly important social dynamic.
For the private or state investor, there are three ways to make a deeper ESG impact:
• The first is exclusion – stop investing in regions, countries, and companies that are not aligned with your values.
• The second is integration – invest in regions, countries, and companies that reflect your values in terms of ESG concerns.
• The third is impact – choose to invest in companies that are making a measurable impact.
Commonly, ESG filters are applied to exclude or integrate companies. The first step is to select companies that have robust financial metrics and can generate longterm growth. The second step is to further filter these companies based on ESG criteria.
• Environment: Recognising the need to address the challenges related to environmental impact, several companies are adopting measures or creating solutions to reduce emissions and protect the environment.
• Social: The policies followed by companies in terms of diversity and inclusion and employee and vendor engagement can have an impact on society. Thus, a company’s social code and culture become highly relevant.
• Corporate governance: Enduring companies follow good corporate governance practices that are well-aligned with shareholder objectives and can create value for all stakeholders.
By adopting sustainable investing, high net worth individuals (HNWIs) can generate long-term positive returns while proactively taking steps to limit the impact of unsustainable practices on society and the environment. For example, those concerned about the water crisis can easily find ways to invest in companies that are working towards creating irrigation or desalination solutions. On the other hand, if you are passionate about addressing the climate crisis, then you can channel your money into companies that are focused on alternative energy or those that have set clear objectives in terms of reducing their carbon footprint.
The transition to sustainability is happening at a rapid pace and the GCC cannot afford to be passive about sustainable investing.
Vipul Kapur is the head of Private Banking at Mashreq Bank