The above picture is for illustration and is of Arab News.
The topic of ESG (environmental, social and governance) principles is back on the agenda as the world witnesses catastrophic flooding and fires not seen in decades, with “climate change” due to environmental mismanagement the seeming culprit.
While sustainability is now a hot topic due to the increasing awareness of climate change and global inequality, at the same time there is a debate that an application of ethical-based investment decisions by society at large can lead to a more sustainable economic and social basis, leading to questions about whether ethical investment and sustainability derived from ESG application are interlinked or separate issues.
There is still no universal definition of sustainability, but many note the seminal UN 1987 Brundtland Report that calls for sustainable development, which, in principle, meets our needs today without compromising the needs of those in the future. Others argue that religion has advocated similar principles, with Islam specifically stating that humans are mere guardians of nature’s wealth and not its owners and should act accordingly in this guardianship role to pass it on to future generations. Thus, the idea of meeting our needs without sacrificing the needs of our future generations is the basis of what the majority of mankind can agree as meeting a definition of “sustainability.”
The definition by default focuses on our planet’s capacity to meet our economic needs, as without a healthy planet, society will be unable to meet sustainable needs for food, shelter, clean air, water and other basic necessities of life. This, however, assumes that all societies accept the same “sustainability” definitions and goals, but in reality there are different opinions as these touch on politics and the degree of economic growth and resource consumption by different countries.
The debate is stark and will not easily go away with simple slogans as it involves those “who have” versus those that “have not,” a “North” vs. “South” debate, or more crudely, stopping a poorer “South” from “having their place in the sun” and in turn asking the “North” to sacrifice more for the sake of global sustainability and equality.
There is growing evidence that companies that take their environmental and social responsibilities more seriously perform better financially, making their shareholders happy and feeling righteous too.
Dr. Mohamed Ramady
The poorer “South” will argue that the “North’s” high-income earners are far more likely to be contributing disproportionately to climate change, while those who live in less affluent parts of the world are more likely to suffer the consequences. They watch in awe and disbelief as multibillionaires spend a few minutes joyriding in outer space at a cost enough to provide whole villages with proper sanitation, health, education and safer transportation, let alone feed hungry mouths.
In practice ESG today refers to the environmental, social and governance information about a firm and there is growing evidence that companies that take their environmental and social responsibilities more seriously perform better financially, making their shareholders happy and feeling righteous too. The bottom line for all is that ESG is good for business. The UN-Global Compact value driver model uses key business matrices common to all industries to determine the return on investments of corporate sustainability activities. These can be best summarized under: Growth (revenue growth from sustainable products); productivity (cost savings from sustainability related innovation); and risk management, all leading to a higher return on equity.
Have these matrices made an impact on corporate performance in reality? In essence companies that follow enhanced ethical and economic sustainability management characteristics have the potential to perform better over time, but the question is where? It would seem that improvements in environmental performance achieved with better technology, leading to cost savings and process efficiency, is one way, resulting in high sustainability companies outperforming their counterparts over the long term, through stock market and accounting performance. Analysis of some ESG-related stock market indices such as the MSCI KLD 400 Social Index, and MSCI Emerging Market ESG Index, seems to support this argument. So, what is missing to implement ESG?
In forthcoming articles, we shall examine the role of sustainability accounting, corporate stakeholders interaction and the need to educate both capital market borrowers and lenders on ESG policies, and on how international ESG regulators have faced this.
• Dr. Mohamed Ramady is a former senior banker and Professor of Finance and Economics, King Fahd University of Petroleum and Minerals, Dhahran.
Bibhu Mishra of Humboldt University, Berlin elaborates on Transitioning towards sustainable economy: Role of financial institutions such as Central Banks and financial systems in The Times of India.
Transitioning towards sustainable economy: Role of Central Banks and financial systems
“For peace to reign on Earth, humans must evolve into new beings who have learned to see the whole first”, said Kant.
Climate change is real; it affects and will affect everyone. Mother Nature sends its signals regularly, and most recently through the flash floods in western Germany. These signals are an urgent reminder that we need to take action now. The action must be collective, significant, timely, and futuristic because, in the long term, the risks outweigh the costs.
The Paris climate accord is one such step in the right direction. A holistic and stakeholder-driven approach would be required to achieve the target of maintaining temperature rise by 1.5 degrees Celsius. One of the most significant stakeholders in such efforts is the global financial system. The financial system’s role is pivotal because they provide finance and steer economic growth. Their actions have a significant impact on ESG, i.e., Environment, Society, and Governance.
There is a tremendous surge in investments which keeps ESG at the core of investment decisions. According to Bloomberg, ‘ESG assets may hit $53 trillion by 2025, a third of global AUM’. Despite a phenomenal rise in ESG assets in the past decade, the financial system still faces challenges like ‘short-termism’ and ‘greenwashing.’
Therefore, the role of Central Banks is vital. They look at the financial system of a country as a whole. Former Governor of the Bank of England, Mark Carney coined the concept ‘Tragedy of the Horizon’ to explain this. He argued, “the catastrophic impacts of climate change will be felt beyond the traditional horizons of most banks, investors and financial policymakers, imposing costs on future generations that the current one has no direct incentives to fix.” It is a tricky paradox where the current system has little or no benefits but to save the planet in its current state or better for the coming generations.
Realizing the importance of its role, eight central banks and supervisors created (In December 2017) a ‘Network of Central Banks and Supervisors for Greening the Financial System (NGFS).’The NGFS is aimed to make coordinated efforts to combat climate change. As of June 30, 2021, the NGFS has grown to a network of 95 members and 15 observers. The Network’s purpose, in their own words; “to help strengthen the global response required to meet the Paris agreement’s goals and enhance the role of the financial system to manage risks and mobilize capital for green and low-carbon investments in the broader context of environmentally sustainable development.”
The NGFS is a significant step towards bringing central banks of different countries together and ensuring that central banks take the leadership role in fighting against the climate crisis. In its first comprehensive report (Pub 2019), It came up with the following six suggestions and floated the idea of global collective leadership.
Integrating climate-related risks into financial stability monitoring and micro-supervision
Integrating sustainability factors into own-portfolio management
Bridging the data gaps
Building awareness and intellectual capacity and encouraging technical assistance and knowledge sharing
Achieving robust and internationally consistent climate and environment-related disclosure
Supporting the development of a taxonomy of economic activities
Additionally, the steps taken by the Central Banks of England (Bank of England) and France (Banque de France) are noteworthy and worth a mention.
Recently, the [Central] Bank of England launched a stress test for banks and insurers to understand the ability of the UK Financial system to cope with climate change. The test is aimed to examine the resilience of the UK’s 19 biggest banks and insurers. The stress test can also be looked at as an acknowledgement that Climate Change poses significant financial risks to the existing financial system. Therefore, early planning of a transition is necessary.
Moreover, ‘Banque de France,’ the central bank of France, took several initiatives to transition the financial industry into zero carbon. In June 2021, the French ACPR (Autorité de contrôle prudential et de résolution, English translation: French Prudential Supervision and Resolution Authority) published the first climate pilot exercise report an overall ‘moderate’ exposure to climate risks.
Let’s understand the risk through an example. Investing in fossil fuels may generate returns in the short term,’ but it will accelerate climate change and, hence, negatively impact the ESG. The negative impact on climate could cause erratic rains or severe drought, leading to an adverse effect on investments made in agriculture and allied sectors. One sector’s gain can be the loss of another sector, posing a significant risk before the overall financial system.
To ensure a smooth transition of the financial system towards sustainability and make it resilient from other systemic risks, early and coordinated action is needed. Central Banks and financial systems have a significant role to play in our journey towards sustainability.
Bibhu Mishra is a German Chancellor Fellow at Alexander von Humboldt Foundation and a researcher with Institute of Asian and African Studies, Humboldt University, Berlin.
It’s all about Value. It’s the name of the game. Create it economically; capture it distinctively. So, a ‘value proposition framework’ for sustainable development is put forward here by Green Biz authors.
A ‘value proposition framework’ for sustainable development
Whatever theoretical economic framework (such as game theory or decision analysis) or business model you want to select, value is at the heart of it. Individuals, organizations businesses and governments act to increase value — also referred to as utility — from their perspectives.
We believe this is a key to understanding the actions of various stakeholders in sustainable development, developing new strategies for making sustainability progress and, most important, for building effective collaborations across and between stakeholders upon which real sustainability rests and relies.
Collaboration requires a desire for shared value — finding the commonalities in seeking defined outcomes, then working together to increase utility or value propositions for all involved stakeholders. Not everyone needs to like each other or agree on every outcome to build effective collaborations, but they also can’t be at odds. This requires all parties to understand perspectives and find the common ground.
Businesses — with their human, financial and capital wealth — represent an enormous (or potentially enormous) powerful force when it comes to sustainable development. Therefore, we think it critical to understand the value propositions that all businesses face — both danger and opportunity — in terms of sustainability. In the long run, their viability and success also depend upon it.Collaboration requires a desire for shared value — finding the commonalities in seeking defined outcomes, then working together to increase utility or value propositions for all involved stakeholders.
All companies have in common five primary value propositions, although not everyone regards them as a set. Each has a direct connection to sustainability:
Growing the bottom line: Profit
It’s the bottom line — revenues minus the costs — that still makes the ultimate business case.
It’s also one of the easiest cases to make for sustainability. A company can increase its profit directly by reducing costs, and for many companies, energy, water and waste costs can be significant.
Reducing these through focused measurement, process improvement and/or specific projects can directly improve the bottom line while also improving the sustainability of the overall enterprise. It is where many companies start their sustainability engagement and with good reason: The economics can be enormous.
Dow Inc., in its first set of 10-year sustainability goals, returned $4 billion to the company on a $1 billion investment in projects. Energy reduction also reduces costs and carbon emissions. Reducing its environmental “footprint” is also often the most immediate way for a company to build credibility for its sustainability efforts. Companies that talk a good game about sustainability but don’t take meaningful action to reduce their own footprint lose credibility and reputation, which hurts them in markets for products and services, talent and investment.
Growing the top line: Revenue
Revenues grow through increasing market share or successful development of new products and services in response to society’s needs and desires, and it’s clear that sustainability trends have become big drivers.
Tesla is one example of visionary and bold investment in a single, although major, sustainability driver: electrification of mobility. Tesla has been very successful in this regard, but looking across all auto companies, you see the accelerating interest — and new product announcements — to capitalize on this incredibly important driver. (It will be interesting to see if GM and Ford can make the transition to become leaders in the future of electric mobility; we like their chances).
In the water area, companies such as EcoLab have built entire platforms around the management of water, cleaning water and recycling of water. The list goes on, but the key principle here is to identify the trends, invest in R&D and new products and processes, and ride the wave all the way to successful business growth.
Attracting, developing and retaining top talent
Employees are the core of any successful company. Top talent is drawn to — and kept in — companies that are successful in developing and implementing the kind of proactive sustainability strategies for their companies that make a material and purposeful difference.
Very few top students want to join a company whose activities are viewed as making climate change worse or polluting rivers and oceans or harming biodiversity and nature. Sustainability is the new “table stakes” for attracting top talent today.
When Neil was CSO at Dow, Dow attracted thousands of new employees in China from top universities with a “Green Jobs” program where recruits could join Dow to have real sustainability impact in applying their degrees (and Dow’s retention rates for these students was much higher than peer companies). When Laura was director of communication/citizenship at Dow Corning, top students didn’t wait for on-campus recruiting. When the company launched its first Citizen Service Corps, students started calling the company’s media center.
Look at any companies on campus these days and you will see that their efforts in sustainability are featured prominently. What is more interesting is the importance of sustainability to developing and retaining top leadership talent.
Like a customer you don’t want to lose, retaining the most valuable employees is critical. The drivers for hiring new talent are really the same as “rehiring” current employees. Dow very successfully used sustainability experiences — special projects, in-field assignments, academies and simulations — to develop leadership and strategy skills, while integrating sustainability across the company. Many of these future leaders remained because of the skills that Dow invested in for them in sustainability.
Attracting and retaining investors
All companies require capital. And the pace of acceleration for consideration of environmental, social and governance (ESG) factors has increased significantly. Virtually no company can survive and thrive anymore with its investor base without addressing sustainability concerns as an enterprise.
Dow started third-party verified Global Reporting Initiative (GRI) reporting more than 15 years ago, and it learned and grew along the way; it worked with other reporting programs such as CDP as well. In 2020, Dow was named to the Dow Jones Sustainability World Index (DJSI) by S&P Global, the 21st year Dow has achieved this prestigious ranking due to its comprehensive sustainability programs. Dow became much more involved more than five years ago after the Paris climate talks when Michael Bloomberg and Mark Carney appointed Neil (then Dow’s CSO) to join the Task Force on Climate-related Financial Disclosures, part of the Financial Stability Board.
Dow helped establish the reporting criteria, but beyond that, the experience provided Dow real learning and insight into where banks, financial institutions, insurance companies, bond underwriters and investors were headed. All companies today need to pay careful attention because investors are paying careful attention. One has only to read BlackRock CEO Lawrence Fink’s growing expectations in his annual letter or observe ExxonMobil’s abrupt board member changes to see that the term “activist investor” has been redefined. Times have changed.
Collaborating for mutual success while addressing key challenges
Finding safe places to collaborate to create the healthy ecosystems in which enterprise thrives is critical: supply chains, marketplaces, workforces, communities, industries — no company goes it alone.
Finding safe places to collaborate is neither easy nor simple. Competitors have antitrust concerns. Customers and suppliers have adversarial positions relative to costs. NGOs often have adversarial advocacy positions to individual companies or to whole industry sectors, and governments view their roles as to regulate and tax companies.
All of that adversarial energy can be put to better use if the focus is on more narrow objectives, especially those that involve sustainable development of regions, countries and the world as a whole. There is usually widespread agreement that we cannot regulate or litigate to stop negative trends in nature, public health, social equity and ecosystems, and that if we work together we can accelerate progress. But to do that requires a maturity of perspective on the part of stakeholders that we can agree to disagree on many things, but still find common ground to solve more narrow challenges.Adversarial energy can be put to better use if the focus is on more narrow objectives, especially those that involve sustainable development of regions, countries and the world as a whole.
The collaboration between The Nature Conservancy (TNC) and Dow, which recently celebrated its 10th anniversary, is one such example. Finding ways to incorporate the value of nature inside the company to better inform strategic decisions was of interest to Dow, and TNC was interested in preserving nature. Both saw that valuing the services of nature would help them to meet their respective goals, and they could collaborate with integrity. It set a new standard and example for collaboration, which continues to benefit both organizations, serve as an example to companies and organizations across industries, and preserve and enhance nature, using the power of capital in a way that no mere philanthropic strategy ever could.
When Dow worked with the University of Michigan to establish the Dow Graduate Sustainability Fellows more than a decade ago, significant faculty concerns were raised about their independence and intellectual academic freedom. Together, the company and the university put in place safeguards in response to those concerns, and hundreds of Dow Sustainability Fellows have benefitted, as have the University and those communities whose projects were addressed and implemented.
Neither example would have occurred without a strong platform for collaborating on sustainability challenges. These collaborations have helped Dow advance its business strategies and helped it learn and grow, positioning the company for future success. At the same time, these stakeholders also thrived. Win-win.
Value propositions for corporate sustainability
What company does not want top- and bottom-line growth? What company does not want top talent in their sector? What company does not want access to capital that is lower cost and more plentiful? And what company does not need platforms to collaborate with their value chain, in their communities and with their governments?
This five-part value proposition framework holds that promise for companies. Nothing short of their survival and growth is at stake today.
But we also believe that the other major stakeholder groups can benefit from understanding this framework for companies, by surfacing new ideas and creating proposals for collaboration that are more sophisticated in understanding the aspirations of their prospective company partners. At the end of the day, we all want to drive more sustainable action and bringing all stakeholders into collaborations will help us accelerate progress. Show comments for this story.
SCOOPEMPIREBusiness provides a Guide for MENA Investors in its Essential Tips for Investing in Gold and Silver. Or is it another way to providing a safe door out of the increasingly Fossil Fuels divestment world trends? Let us find out.
A Guide For MENA Investors: Essential Tips For Investing In Gold And Silver
Precious metals such as gold and silver are fascinating investment asset classes, which also offer the benefits of stability and predictability to traders across the globe.
For example, despite being separated by a number of key differences, both gold and silver see demand and price points soar during specific times, in which each asset is heavily influenced by an array of macroeconomic factors.
Interestingly, precious metals are particularly important for MENA populations, both culturally and from a wider investment perspective. However, when is the best time to invest in gold and silver? We’ll explore this question further below!
The Importance of Precious Metals Amongst MENA Populations
While China and India remain the dominant buyers of gold and precious metals in the global marketplace, there’s no doubt that certain MENA countries are becoming increasingly influential within this space.
To provide some context, China and India acquired more than 364 tonnes of gold jewellery alone during the first quarter of 2015, with this number having increased incrementally through 2019.
However, while the US trails behind in third place in terms of precious metal procurement and consumption, MENA nations are beginning to threaten the established status quo within the industry.
Make no mistake; Saudi Arabia and the UAE are now established as the fourth and fifth biggest buyers of gold in the world, with this trend increasingly driven by cultural elements and age-old traditions (particularly those pertaining to religious celebrations and weddings).
The Economic Case for Gold and the Best Time to Invest
In the MENA region, gold purchases are also commonly completed as an investment, particularly given the increasingly uncertain economic climate that persists across the globe.
The world has seen two significant economic crises during the last decade. For example, in the form of the great recession, and the financial fallout from the coronavirus pandemic.
As a result, gold has never been more fashionable and relevant as an alternative investment, thanks to its reputation as a secure store of wealth and viable hedge against uncertainty, and the inflationary pressures of fiat currencies.
While silver boasts similar qualities, it boasts far greater industrial usage, and is far more likely to increase in value as countries move out of a recession. This point of difference underpins the so-called “gold-silver ratio,” which encourages investors to hedge their bets in both metals, by taking a short position in either gold or silver (depending on live prices and the prevailing economic climate).
As a general rule, however, it’s best to purchase gold during times of economic tumult, whilst transitioning to silver as the global economy and demand begins to improve.
Where to Trade Gold and Silver
There are also plenty of options in terms of how to trade gold or silver, aside from physical procurement and leveraging these precious metals as tangible stores of wealth.
You can also trade precious metals through derivative products such as contracts-for-difference (CFDs), which are ideal from a practical perspective, as physical gold trading is incredibly inefficient and non-cost-effective.
Through CFDs, you can also gain flexibility by profiting through gold and silver price speculation, as you can simply trade price movements and fluctuations that occur on a daily basis.
Arina Kok of The Edge Malaysia in My Say: Sustainable finance a lever for growth, demonstrates how sustainability should be omnipresent in all development plans thinking as well as implementation.
Recent studies show that future years will be hotter than ever, and growing pressure from all sides to go beyond beautifully designed sustainability reports would be a must. Consumers and suppliers ought not to just value sustainability; they should prepare to pay for it. For instance, assets in dedicated sustainable investment strategies went over $1 trillion by June 2020.
In January, the country was badly hit by floods that displaced nearly 50,000 people. This exacerbated the impact of Covid-19 on struggling businesses, livelihoods, the healthcare system and the economy.
My Say: Sustainable finance a lever for growth
The pandemic aside, the Malaysian economy had suffered RM8 billion worth of damages, owing to climate-related events between 1998 and 2018. Given the rising magnitude and frequency of climate risks and their impact on businesses and society, the call to action is clear — strong cooperation between financial institutions and policymakers, businesses and society will be critical to drive the coordinated transition to a resilient and low-carbon economy.
To accelerate the transition, increased mobilisation of sustainable finance is needed to fund mitigation initiatives such as clean energy, energy efficiency and sustainable transport, and adaptation initiatives such as disaster management, infrastructure upgrade and sustainable land use.
Sustainable finance can be defined as any form of financial service that incentivises the integration of long-term environmental, social and governance (ESG) criteria into business decisions, with the goal of providing more equitable, sustainable and inclusive benefits to companies, communities and society.
While negative screening, such as absolute avoidance of activities, and thematic investing in selected sectors, such as clean energy, are commonly practised in sustainable finance, there is also a growing focus on diversifying sustainable financial practices into three other areas:
ESG integration — incorporating ESG information and analysis into investment decisions with the objective of enhancing risk-adjusted returns;
Norm-based screening and best-in-class (positive) screening according to defined ESG criteria.
Risk aside, climate change also presents opportunities to increase the range of financial products and services for renewable energy, green buildings and climate-smart agriculture and cities. The International Energy Agency projects the need for US$3.5 trillion (RM14.4 trillion) in annual global investments to build the infrastructure for a green economy.
Our World in Data, publisher of research and date of the world’s largest problems, found that the cost of solar and wind power plummeted at a staggering rate between 2009 and 2019, with the price of new solar falling by 89% and the price of onshore wind by 70%. It is now cheaper to invest in new renewables than in new coal power in every major energy market in the world, and soon it will be cheaper to build new renewables than to continue operating existing coal plants.
As markets advance in factoring ESG into risk-adjusted returns and more sustainable funds build competitive performance records, the lingering doubts about sustainable finance will diminish. According to S&P Global Trucost, over the past six years, the Standard & Poor’s 500 SDG (Sustainable Development Goals) portfolio increased by 136.2%. This compares with the S&P 500 portfolio, which generated a return of 125.8%. The research also indicated that companies with a higher proportion of their revenues coming from SDG-related products and services tend to outperform those with a lower proportion of their revenues.
The challenges in driving sustainable finance lie in having a clear direction and incentives to pivot from traditional investing strategies. The availability of quality ESG information is also an ongoing challenge, as most businesses are at different maturity levels in managing and reporting on ESG practices. While regulatory and market standards continue to be developed, a coordinated transition requires a system-wide engagement and effective reporting policies to be implemented.
In response to the need for common industry standards and frameworks, Bank Negara Malaysia is collaborating with the local financial industry to issue Value-based Intermediation Financing and Investment Impact Assessment Framework (VBIAF) guides for the different sectors.
The sectoral guides will facilitate the practical implementation measures pursued by the Joint Committee on Climate Change, including the Climate Change and Principle-Based Taxonomy that will be finalised soon. The first set of VBIAF sectoral guides on palm oil, renewable energy and energy efficiency was issued on March 31, while the second set for the oil and gas, manufacturing, construction and infrastructure industries will be issued by year end.
The right strategy
With increasing pressure from the regulators, investors, organisations and society need to clearly define their sustainable finance strategies, resilience to emerging risks and their role in the global transition to the green economy. Successful sustainable finance strategies will be those that are actionable.
Setting the right strategy starts with defining just where and how organisations should engage in sustainability. It is not just a matter of figuring out the right policies, but of identifying the right actions to make sustainable finance a lever for growth. The board and senior management will have to think about the organisation’s purpose and mission. The right answers will help define sustainability goals that suit the organisation — those that are measurable, authentic, achievable, meaningful and aligned with stakeholders’ needs.
The right strategy is essential because greening the economy has huge potential upsides and may be the greatest commercial opportunity of our age.
This article first appeared in Forum, The Edge Malaysia Weekly of 10 to 16 May 2021.
Arina Kok is a director of Ernst & Young Advisory Services Sdn Bhd’s climate change and sustainability services (CCaSS) practice. The views expressed are those of the author and do not necessarily reflect the views of the global EY organisation or its member firms. This is the second of a three-part series on sustainability in conjunction with Earth Day 2021.
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