The Promise Of A Better Planet

The Role Of ESG Investing In Catalyzing A Paradigm Shift In Business

I began working as an internal auditor at Unilever’s subsidiary Hindustan Unilever Limited (HUL) in India for over 3 years beginning in the summer of 2001 . My role took me to factories manufacturing home and personal care products ranging from soaps, detergents to shampoos all across India. I also visited a few factories manufacturing fertilizers used in agricultural lands across India. In all of my years, nothing made me prouder of Unilever than its rich heritage. A close second would be its impressive supply chain that straddled the length and breadth of the country. Its reach extended to villages that even government enterprises had failed to penetrate.

Advert for Lifebuoy Soap from Animal Life and the World of Nature; A magazine of Natural History (1903).

Unilever has its roots in manufacturing the ‘Lifebuoy’ brand of soaps which remains an icon of personal hygiene even today. I remember seeing Lifebuoy advertisements as a child. After seeing those advertisements and after having worked at Unilever, I thought socially responsible behavior to be great business sense and the bedrock of a sustainable business. Not every company is in the FMCG / CPG business but I thought to myself: what if all businesses put the promise of a better planet first? Wouldn’t profits follow as a natural consequence? Of course, the reality today does not mirror my sentiments. However, I feel a glimmer of hope with the rise of ESG investing. ESG investing could force many businesses to at least consider an idealistic view of business.

The Power Of An Idea

Although many claim that Bitcoin made them rich, the true power of Bitcoin does not lie in its function as a new kind of asset class (digital currency) to invest in or to make speculative gains from. The power of Bitcoin lies in the fact that it is a proof of concept (an executable idea that required worldwide collaboration) that proved to the world that the Blockchain is a very powerful technology and that it was possible to create a digital currency powerful enough to challenge the very concept of money. It is not surprising that many people end up using the words ‘Bitcoin’ and ‘Blockchain’ interchangeably. In other words, as I have written before — the power of Bitcoin lies in its ability to start a revolution.

Similarly, while many may argue that ESG investing is a fad. The truth is that the power of ESG investing does not lie in the act itself. Rather, its true power lies in its ability to catalyze socially responsible corporate behavior. ESG investing compels most CEO’s to introspect : Is my business harming the planet more than benefiting it?

Granted that the environmental pollution that Bitcoin contributes to through the use of coal fired power plants makes it antithetical to the idea of ESG investing. I am just using these two ideas to prove a different point.

What is key to learn from both the ideas i.e. Bitcoin and ESG investing is that ideas need to be both simple and powerful at the same to inspire meaningful change. When an idea is simple to understand, people don’t have to ask why it is a good idea. They instinctively know it is a good one. Now, if an idea can do more than make its own case i.e. if an idea can inspire — you have a revolution on your hands. An idea that plucks the strings of the heart and mobilizes societies across the globe to take action has to be both simple to understand and powerful enough to inspire. One such idea is ESG investing.

An Introduction To ESG Investing

Perhaps, it was mere coincidence that I became interested in learning more about ESG (Environmental, Social and Governance) investing around the same time I saw a Youtube video featuring Apple’s robot Liam in March 2016. Liam was an example of using the same materials over and over again. In other words, Liam disassembled parts of a used iPhone to be used as raw materials for a new one. An example of business imitating nature. Nature uses closed loop system all the time to eliminate waste and to use the output of one process as an input to another thereby maintaining balance and eliminating harm. The idea is both profound and simple. However, this is just one example of socially responsible corporate behavior. ESG investing aims to fuel this trend until it becomes a fire.

Apple on YouTube

While Corporate Social Responsibility (CSR) outlines companies responsibility to adopt socially and environmentally friendly business practices, ESG indicators attempt to measure the impact of CSR initiatives. ESG investing goes one step further — ESG funds put their money where their mouth is. Although, not every ESG focused Exchange Traded Fund (ETF) can claim to have done so.

As per Forbes, the term ESG was first coined in 2005 in a landmark study entitled “Who Cares Wins.” Today, ESG investing is estimated at over $20 trillion in AUM or around a quarter of all professionally managed assets around the world, and its rapid growth builds on the Socially Responsible Investment (SRI) movement that has been around much longer.

In 2006, United Nations released the Principles for Responsible Investment. The UN Principles for Responsible Investment (PRI) is an international organization that works to promote the incorporation of environmental, social, and corporate governance factors (ESG) into investment decision-making. As of August 2017, more than 1,750 signatories from over 50 countries representing approximately US$70 trillion have signed up to the Principles.

An Idea Whose Time Has Come

Growing up, I was an idealist. I think the idealist inside me has survived the ravages of time. I still believe socially responsible behavior should be a given for any business to grow and survive over generations. Recent numbers show I may not be alone. As per CNBC, ESG investing is actually a Mega Trend that is here to stay. In the same article, CNBC reported that the year 2019 saw a total of 479 green bonds issued worldwide, up by a quarter compared to the previous year.

Also, as per CNBC, ESG investing — or strategies that take a company’s environmental, social and governance factors into consideration — grew to more than $30 trillion in 2018 (with $12 trillion in the United States alone), and some estimates say it could reach $50 trillion over the next two decades. That’s a massive amount of capital by any means. The Parnassus Core Equity Fund (ticker: PRILX) is the largest fund with Assets Under Management (AUM) of $18.2B.

As per an MSCI publication titled ‘Swipe to invest: the story behind millennials and ESG investing’, a 2019 Morgan Stanley Institute for Sustainable Investing survey of high net worth investors found that 95% of millennials were interested in sustainable investing. This is a powerful combination for two reasons-we are talking of rich people who are also young.

From corporate bigwigs at the World Economic forum and business schools to millennials, everyone has woken up to the reality that businesses can no longer operate in a vacuum if we are to leave a better planet for our children. Business schools have widened their own narrow lenses of looking at businesses as serving only the shareholder by focusing on maximizing shareholder returns.

Its not all that simple though.

First, for listed companies bound by quarterly earnings releases to be truly socially focused, incentives have to align. Environmentally focused efforts should also keep shareholders and employees happy. It is not impossible but it is very hard. The onus also lies on entrepreneurs and small businesses to build a sustainable business from the ground up.

Second, a significant amount of Research and Development (R&D) expenditure is needed to pivot to more environmentally friendly business processes many times at the expense of shareholder returns.

Third, there is a lack of standardized approach in measuring and comparing ESG metrics. There are many frameworks for measuring ESG performance without a clear winner.

Fourth, it will take a confluence of all market participants to uphold the ESG ideal. The SEC in the US has not made standardized ESG disclosures mandatory. There is also an absence of a strong regulatory framework governing ESG reporting.

Finally, if businesses believe as John Maynard Keynes once said — ‘In the long run we are all dead’, they will end up solving for the short term by ignoring longer term implications for our planet.However, I am an eternal optimist and I continue to believe in dancing elephants as much as Lou Gerstner Jr. — ex-CEO of IBM and author of the book ‘Who Says Elephants Can’t Dance?’ once did.

I dream a corporate world filled with dancing elephants balancing corporate profits with the promise of a better planet.

Writer @ The Intersection of Finance, Tech & Humanity. Stories of a Global Language: “Money”. Contributor @ Startup Grind, HackerNoon, HBR. Twitter@akothari_mba

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