One of the global conversations in the past two decades has been on climate change and the need to protect and sustain the environment. Across different sectors and various levels of global leadership, concerns have also been raised with some solutions proffered to address this issue as well as social challenges and poor corporate governance practices.
One of the approaches in dealing with these issues is the promotion of sustainable financing. The Bank of Ghana and the Ghana Association of Bankers have pioneered this in Ghana with the Vice President, Dr. Mahamudu Bawumia, subsequently launching Ghana’s Sustainable Banking Principles and Sector Guidance Notes for the banking industry on November 27, 2019. The Securities and Exchange Commission (SEC) also signed an agreement in May 2021 with the International Finance Corporation (IFC) for the development of a green bonds market in Ghana. Sustainable financing requires the need for businesses to modify their traditional models and modus operandi to incorporate ESG principles – environment, social and governance.
Over the years, investors have focused on returns and security of investments, however there is an overarching need to add another cardinal consideration in the investment decision process – how will this investment or how will this investee company’s business activities impact the society and the environment and what corporate governance structures are being practiced? The United Nations Principles of Responsible Investments (UNPRI) defines responsible investing as a “Strategy and practice to incorporate environmental, social and governance (ESG) factors in investment decisions and active ownership”.
Responsible investing therefore encourages investors to look beyond their returns and also consider the effect of the business on the environment, how the business addresses social issues, and the application of corporate governance while generating its profits. The ESG principles have been adopted to help guide businesses on how to be environmentally friendly, socially responsible and apply appropriate governance while doing business.
The ‘E’ (environment) focuses on global warming and climate change implications and how to preserve the environment – preservation of forests and water bodies and the reduction in carbon emissions. An example is investing in a small-scale mining business that mines minerals close to water bodies. The return may be good albeit short term but the impact of the business on the environment is dire with grave medium to long term consequences.
Beyond the felling of trees is the use of chemicals that destroy the water bodies and also endanger human health. In responsible investing such businesses will not receive funding or before funding is granted, the small-scale business will have to review its business model and consider green mining which involves practices that are not harmful to the environment. Other considerations that investors may consider in assessing the friendliness of a business to the environment is the use of fossil fuel (emissions), use of water (conservation and recycling), air pollution, waste disposal, etc.
Responsible investing promotes the adoption of policies that enable businesses or institutions to incorporate measures to deal with factors that adversely impact the environment either directly or indirectly. Some of these policies or measures include the use of efficient energy consuming electrical appliances, solar lighting, eco-friendly buildings water recycling setups, efficient use of water, treated waste materials and proper disposal of harmful waste, use of biodegradable plastics, etc.
The ‘S’ (Social impact) focuses on business relationships and how a business relates to its employees, the society, and the people around it, including suppliers. A socially responsible business takes good care of its employees and are sensitive to issues of gender balance, equality and diversity. The business’s relevance to its community is also considered. Businesses that make the effort to improve the lives of people in their communities through foundations, projects and other community engagement activities are attractive to socially responsible investors.
The ‘G’ (governance) covers the practices and policies of the business in the light of ethics, transparency, and accountability. Responsible investors pay attention to the business’ accounting policies and procedures; top-level decision-making processes such as that which avoids conflict of interests; rights and responsibilities of stakeholders to ensure transparency and accountability.
Socially responsible investing (SRI) and impact investing are subsets of the responsible investing approach. SRI focuses on social values as a key consideration when making investment decisions. SRI investors avoid investing in businesses whose products, services or operations are perceived to be unbeneficial to society. These typically include businesses that deal in alcohol, gambling, weapons, pornography, unhealthy food, among others.
Impact investors seek to generate measurable social impact with their investments. These investors use their funds to directly address social and environmental issues through deliberate investment in sectors such as healthcare, education, agriculture and renewable energy. Impact investors also consider investment opportunities which support societal development including increased employment opportunities, improved standards of living, and so on.
Investors may not see immediate relatively higher returns as responsible issuers or businesses adopt and implement policies under ESG, however, the medium to long term benefits provide sustainable returns and benefits that goes beyond just the investor to the community and the nation. As investors question and demand the adoption and implementation of ESG before providing financing or investing, issuers and institutions who raise capital will begin to pay attention to ESG principles. Issuers will also become attractive as they adopt and implement ESG principles to ensure a sustainable future for all.
The writer is the Chief Investment Officer, Stanbic Investment Management Services (SIMS)