ESG funds have been one of the most important topics in recent years for the financial market. After all, sustainability and concern with governance practices are increasingly on the rise, leading many funds to adapt to this reality. First coined in 2005, in a United Nations meeting entitled “ Who Cares Wins ”, the acronym ESG stands for Environment, Social, and Governance. The document that gave rise to the term was signed by nine countries, including Brazil. At the time, its objective was to introduce practices and guidelines for this type of investment. Almost 20 years later, ESG is a practically mandatory topic for companies, governments, and large funds.
Why have ESG funds become a trend?
The growing adoption of ESG funds is the result of a series of factors that have impacted the financial market in recent years. This is because, in addition to the interest in meeting the demands of a public that is more aware and concerned about social and environmental issues, companies are seeking to better position their image in the market. Furthermore, the inclusion of the ESG standard in business can benefit organizations with tax incentives and the reduction of risks associated with damage to the environment, for example.
Although the adoption of ESG criteria is well developed in markets such as Europe, in Brazil the topic is not yet much debated. For example, according to data from a survey carried out by ANBIMA carried out with asset managers and administrators, only 48.54% of companies have any general policy or document on responsible investment. However, 20.39% of organizations are already organizing themselves to adapt to this reality.
Mckinsey, a renowned global consulting company, carried out a series of studies to try to explain why ESG has become a global trend. Three reasons were identified:
Increased demand for products and services that comply with ESG criteria
According to data from the studies mentioned above, more than 70% of consumers researched purchases in various sectors, including automotive, construction, electronics, and packaging. This same group stated that they would pay up to 5% more if environmentally friendly products met the same performance standards as “non-green” alternatives.
Cost reduction
ESG can also significantly reduce operational expenses, such as raw material usage or electricity costs. Here we can cite a Brazilian example of the Casino Group, owner of the Pão de Açúcar chain, which created a company called GreenYellow to assist in the energy transition in its supermarkets. The result could not be more efficient. Through simple measures such as installing LED lighting and placing refrigerator doors, the organization made a profit of R$166 million in 2020.
Increased productivity
Knowing how to deal with employees with empathy and provide them with an appropriate and satisfactory environment is also one of the pillars of the ESG movement. This can be seen in the study by researcher Alex Edmans, a professor at the London School of Economics, where companies that managed to establish a connection between employees and internal values obtained higher returns on their shares.
Positioning of organizations in relation to ESG practices
At the beginning of the year, ANBIMA (Brazilian Association of Financial and Capital Market Entities) published an unprecedented survey that revealed what institutions think about sustainability practices. The study also identified five behavioral profiles among participants:
- Suspicious: understand that ESG practices threaten business development;
- Distant: associate the ESG theme only with environmental issues;
- Beginners: also restrict ESG in the environmental aspect, but take concrete actions in this direction;
- Emerging: understand the importance of ESG practices and seek to implement some process in this area;
- Engaged: they view sustainability strategically and align their products and services with good ESG practices.
The result of this research showed that the market has a very heterogeneous understanding of ESG. Another very interesting fact brought up was that 67% of the market understands sustainability as something distant. Therefore, even though concern for the environment is not a priority for all businesses, the tendency is for the market to adhere, gradually, to good ESG practices.
Carolina Souza, Product Manager at BRITech. Reinforced in an interview with Diário do Comércio that: “As companies incorporate these practices, sustainability increases. Generating greater business longevity and benefits for populations and the economy as a all. Over time, more companies will be concerned about having these activities to be well evaluated, generating ‘positive competitiveness’. Capable of generating businesses with less risk and, therefore, more attractive to investors.”
Main trends for the coming years
The themes aligned with ESG, as well as the practices adopted, are aimed at the long term. However, some trends begin to emerge more quickly as the market advances. See below what are the three main trends for ESG companies and funds in the future.
Identification of ESG funds based on technical criteria
At the end of last year, ANBIMA published the criteria for identifying fixed-income and equity funds for sustainable investment purposes. In this sense, the new rules establish the criteria applicable to the fund and the requirements to be met by the manager. In the product identification process, the following guidelines must be observed:
Standardization of ESG disclosures and metrics
Although the market already has extensive data on ESG, there is still no uniform classification to evaluate these practices. As a result, companies, ESG funds, and other sectors end up using their own methodologies. Which can generate conflicts and even serious mistakes. In order to resolve these conflicts, the largest companies in the world addressed the ESG topic in 20203. During the Annual Meeting of the World Economic Forum in Davos. As a result of this discussion, a report
was published defining common metrics for creating sustainable value, supported by the ESG pillars. According to experts. These numbers will contribute to the preparation of a universal report that efficiently meets the needs of analysts and investors.
