In a scenario marked by the climate emergency and increasingly demanding regulations on emissions and environmental care, sustainability has become a cornerstone of the business models of many large companies. Organizations are guiding their decision-making based on ESG (Environmental, Social and Governance) principles in these three essential areas regarding their relationship with and impact on the environment. Those organizations that do not jump on this bandwagon will probably stop being attractive investment targets in the short term.
Breathe or count money: In talking about ESG criteria, we might begin by quoting Janez Potocnik’s provocative phrase to alert the European community as to the health effects of pollution. This expert hit the nail on the head with a brief explanation: “If you think the economy is more important than the environment, try holding your breath while you count your money.” Janez Potocnik was European Commissioner for Science and Research from 2004 to 2009 and for the Environment from 2010 to 2014. She introduced the concept that investment should not only seek profitability, but also be clear on how to manage impacts relative to an organization’s environmental, social and governance issues.
What defines an “ESG company”? A company that manages these kinds of Environmental variables addresses issues relating to the type of energy used, climate change, water use, material reutilization, and the impact of its operations on biodiversity. The Social scope includes all issues having to do with working conditions, ranging from the prohibition of child or forced labor to the cultural diversity of employees, the workplace environment, human rights, relationships with local communities and people’s health and safety. Governance refers to the organizational structure itself and includes issues such as the independence of a company’s directors, remuneration, tax strategy, transparency, compliance and anti-corruption programs, among others.
Davos pushes the bandwagon: The events of 2020, marked by the pandemic and the global economic and social crisis, have led to increased scrutiny of ESG principles by institutional investors and proxy advisors. These findings are reflected in the latest ESG Investment Observatory, published in March 2021. The Davos Forum is one of the global business bodies that has become most aware of the impact of climate risk on the economy and society, so much so that in 2020 it launched a sustainability and inclusive economy manifesto, which states that “the purpose of businesses is to collaborate with all its stakeholders in the creation of shared and sustained value.” Davos is also responsible for publishing the Measuring Stakeholder Capitalism Initiative ESG metrics, which have been adopted by 61 member companies and a group of its International Business Council (IBC) leading executives.
In Chile. Within the framework of the COP26, the Financial Market Commission (CMF in Spanish) issued general regulation No. 461, which requires that corporate annual reports include ESG related information that is in line with current market needs and local and international trends. Furthermore,
In January 2021, S&P Dow Jones Index and the Santiago Stock Exchange presented the first IPSA ESG Index that measures Chilean companies on environmental, social and governance criteria. The five companies with the highest weighting on the ESG Index were Enel Américas, CMPC, Banco Santander, SQM and Banco de Chile. “We are delighted to be working with the Santiago Stock Exchange to continue expanding our ESG strategy in Latin America with the launch of the S&P IPSA ESG Tilted Index. This new index will help investors position ESG principles at the core of their investment portfolios with the goal of achieving performance that largely matches the Chilean stock market,” explained Reid Steadman, Managing Director And Global Head of ESG Indices at S&P DJI, to the Diario Financiero.
What to expect. The most important point is that in 2022, all investors’ eyes will be on companies’ compliance with ESG criteria. With these indicators in place there is no turning back. “Responsible investing is booming: nearly one-third of assets under management worldwide are subject to ESG criteria, which is an increase of more than 30% since 2016,” according to the Global Reporting Initiative GRI, an independent international organization that helps companies and governments around the world understand and communicate their impact on critical issues of sustainability, such as climate change, human rights, governance and social wellbeing, among others. At present, there are five prestigious consulting firms specializing in ESG: S&P Global, Sustainalytics, ISS, CDP and Bloomberg.
