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ESG funds to encourage shift to sustainability

INVESTMENT funds focused on the environmental, social, and governance (ESG) metrics of businesses can help promote sustainability and climate change action.

“With the large growth in funds focused on sustainability and ESG metrics, we think companies are increasingly incentivized financially to invest in sustainability-related or climate change opportunities,” Craig Cameron, portfolio manager at the Templeton Global Equity Group, said in an e-mail on Oct. 22.

ESG-focused funds can help promote sustainability through investing in companies with long-term plans on addressing environmental and social challenges, he said.

ESG-compliant Philippine firms also stand to benefit from focusing on sustainability as more foreign investors “require compliance with ESG standards as already integrated in their decision making process.”

“More investors worldwide have become [keener and more particular] about firms’ compliance with ESG standards as a pre-requisite as part of the decision on investments,” Rizal Commercial Banking Corp. (RCBC) Chief Economist Michael L. Ricafort said in a Viber message on Sunday.

“Firms or companies have no other choice but to comply with ESG from a regulatory and investment or business perspective, lest they will be left behind by ESG-complaint competitors in terms of attracting more investors and customers or business,” Mr. Ricafort said.

By going the sustainable route, companies can also lower their capital costs to allow them to use funds to grow their businesses instead, he said.

“Advocating ESG ensures the firm and stakeholders win over the long term by ensuring sustainability, equity, and being more responsible citizens for the present and future generations, thereby a winning proposition for attracting more investors as well,” Mr. Ricafort said.

Firms are now also looking at their own supply chain to ensure they are working with suppliers and other companies that are likewise working towards reducing their environmental footprint and providing better employee compensation, among other ESG standards, Templeton’s Mr. Cameron noted.

“In our view, regulators can help to provide a framework for investing, such as a taxonomy for green activities, but it is the investors and the companies themselves that will create and find the investment opportunities,” Mr. Cameron said.

“It can improve management of sustainability issues, attract talented employees, improve and develop new customer and shareholder relationships, thereby, improving the long-term viability of the business,” Mr. Cameron said, adding that this may also help investors better compare firms.

However, sustainability reporting should also consider how companies respond in times of crisis.

“The global pandemic has taught us a lot about how our companies value their employees, and we have been impressed particularly with the way some companies have taken the long-term view, putting their employee health and safety first, helping to build long-term employee loyalty,” Mr. Cameron said.

The “consideration of ESG factors is just good business analysis,” as it can help provide a holistic view of the company and its opportunities as well as risks aside from the industry review.

“Regarding the returns profile of different funds, obviously one cannot predict performance, but we think that a fund that does not consider ESG is more likely to underperform the market, because it is simply not performing proper business analysis,” Mr. Cameron said.

The Philippines’ Securities and Exchange Commission is planning to make sustainability reporting for publicly listed companies mandatory beginning 2023. It currently follows a comply-or-explain approach. — K.C.G. Valmonte

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