Singapore has come up with its own guideline called the Periodic Façade Inspection (PFI) stating that Facade inspection will need to be conducted every seven years for buildings that are more than 13 meters tall, once they are over 20 years old. Australia, USA, Canada & Japan are also following suit and with time we will only see more and more countries committing to this important subject.

A study by Refinitiv and Probability & Partners found that companies with higher ESG scores had higher returns than those with lower scores. Additionally, a survey conducted by the Organization for Economic Co-operation and Development (OECD) secretariat, “ESG Investing: Practices, Progress and Challenges,” found that companies with higher ESG scores also had higher returns than those with lower scores.

Additionally, the effect of ESG investing on financial returns can vary depending on the type of investor and the time frame of the investment. [For a discussion about ESG criteria and scores see Dhanada K. Mishra’s article, “ESG—The Greening of Capitalism,” in the December/January issue of The Earth & I.]

Does there have to be a contradiction between the rate of return and ESG implementation? According to Svetlana Borovkova, “the investment community is split into two camps: One side believes ESG comes at a cost of financial returns, while the other thinks that good ESG performance promises better returns and lower risk in the future.”

Implementing ESG initiatives in a competitive business environment requires a well-defined strategy and a strong commitment to its principles. Companies should start by thoroughly understanding their current ESG performance and their goals for the future. This includes setting specific targets for the reduction of their environmental footprint, increasing social responsibility, and improving corporate governance.

Once a company has identified its ESG goals, it should create a plan to achieve them. This plan needs to include a detailed approach to implementation and monitoring, as well as a timeline for achieving the desired results. Additionally, the company should ensure that its strategies and initiatives are in line with industry best practices and regulations and that they are communicated effectively to all stakeholders.

A company needs to ensure that the ESG initiatives are aligned with the company’s core values, vision, and mission.

The company should also ensure that its ESG initiatives are integrated into its overall corporate strategy. This includes ensuring that the initiatives are aligned with the company’s core values, vision, and mission. And finally, the company should ensure that its ESG initiatives are integrated into its operations, from production processes to customer service.

In developed countries, a variety of ESG regulatory frameworks and standards have been established. These include the Basel III framework, which sets out regulations for international banking, as well as the International Financial Reporting Standards (IFRS), which are used by many countries as the basis for their accounting standards. In the US, the Securities and Exchange Commission (SEC) takes a principles-based, accounting-focused approach that applies equally to ESG disclosures. In Europe, a more prescriptive disclosure framework is popular, for example, the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Investment Results—With and Without ESG Considerations

Investments can yield different results depending on market conditions and timing. Investments in general, and ESG investments in particular, tend to provide higher returns over the long term. According to a study conducted by BlackRock, the average ten-year return of ESG-positive funds was 7.4%, compared to the benchmark index return of 6.2%. The study also found that ESG-positive funds in the US outperformed their benchmark index by 0.5%, while in Europe they outperformed by 1.1% because of strong corporate governance. Higher scoring firms in the Morgan Stanley Capital International (MSCI) ESG rating outperformed their peers by 1.5%.

“Investing in positive, solutions-oriented companies focused on sustainability is where the market is going and where investors will excel going forward.”

Greenwashing is a serious problem that obscures the true extent of companies’ ESG implementation. Greenwashing means making exaggerated or false claims about sustainability performance to appear more socially and environmentally responsible or ethical. An egregious example is fossil fuel company claims about how environmentally benign they are.

Recently, it became known that research conducted as far back as the 1970s by some of the largest oil companies, such as Shell and Exxon, predicted global warming as a likely consequence of their business. They even put contingency plans in place to deal with sea level rise affecting their infrastructure.

Today, many companies are not actively working to reduce their environmental impact or improve their social practices but are instead investing in marketing and advertising campaigns to appear more socially and environmentally responsible. This makes it difficult for stakeholders, investors, and customers to accurately assess the true extent of a company’s ESG implementation

One key benefit associated with incorporating an ESG approach into investment decisions is that it can reduce risk in a portfolio by avoiding companies whose business practices may be seen as unethical or environmentally harmful. For example, by choosing not to invest in fossil fuel stocks due to concerns over climate change impacts, investors would avoid any financial losses should oil prices decline due to market forces or policy changes. Such changes are increasingly likely because governments around the world are setting up carbon emissions reduction targets.

In addition, integrating environmental considerations, such as renewable energy sources, into investment strategies can also protect against future regulatory compliance costs caused by legislation designed to tackle global warming issues.

Universally accepted ESG scoring metrics are still evolving, and for the investor to understand, evaluate, and select the appropriate ESG methodology can also be risky.

On the other hand, some potential risks are associated with implementing an effective long-term strategy based on sustainable development goals (SDGs) principles. Many organizations have publicly committed themselves to achieve SDGs through various initiatives, such as reducing greenhouse gas emissions levels. But these commitments often rely upon external factors beyond the control of individual businesses, for example, government subsidies and tax breaks. If these external conditions fail to materialize within the time frame expected, certain investments could become “stranded assets,” losing significant value. In addition, universally accepted ESG scoring metrics are still evolving. For the investor to understand, evaluate, and select the appropriate ESG methodology can also be risky.