In the last few years we are witnessing numerous innovations, also amplified by the Covid-19 emergency, in the world of financial markets: a new active role of the various Central Banks (Fed and ECB above all), interest rates at historic lows, and in some cases negative, enormous available liquidity, little correspondence between the yields of financial markets and the activity of the productive economy.
Among these innovations, there is one of considerable interest, especially from a future perspective, both for investors, who will have to make fundamental investment decisions to stimulate the necessary recovery of the economy, and for institutions that will decide to turn to the markets to find resources that are fundamental to them; this novelty concerns the "ESG" criteria - acronym for "Environmental", "Social" and "Governance" - which broaden the dimension of analysis of a security, since in the evaluation of the activity of an issuer, whether corporate or governmental, the focus is not only on economic and financial aspects, but also on impacts from the environmental, social and good governance points of view.
Analyzing specifically the acronym ESG, we notice how these new evaluation criteria are much less generic and vacuous than they may seem: In fact, in the environmental dimension, for example, several quantitative indicators are considered such as, CO2 emissions and the impact on climate change, the use of renewable energies and the attention to water reserves, biodiversity and food safety; internal dynamics within the company are also analyzed, both in the management and enhancement of human resources, such as the respect for human rights, the attention to corporate welfare and safety, and in corporate governance practices such as the remuneration of senior management, shareholders' rights and the fight against corruption.
The great diffusion of this new dimension of valuation is now a reality almost unanimously recognized in the financial sector; from Goldman Sachs CEO David Solomon to that of BlackRock investment fund Laurence D. Fink, there are now several statements that show us how these indicators are central to investors' choices.
In the Italian context, the actions implemented by Mediobanca SGR, which are based on a combination of negative and positive screening, are worthy of note. The former, through the use of exclusion criteria, aim to remove from the investable mass of shares and bonds issuers directly and significantly linked to the production and/or marketing of arms that violate fundamental humanitarian principles, as well as business types that are contrary to the values of the Mediobanca Group and that could expose the SGR to serious reputational risks; the second, on the other hand, are used to assess the investment also on the basis of precise ESG inclusion criteria, favouring issuers and UCITS with a high ESG rating and companies not involved in serious controversies, and are divided into investment limits differentiated by product type (whether qualified as ESG or non-ESG). In addition to Mediobanca, the asset management group Kairos has also launched KIS Active Bond ESG, a fund that invests mainly in corporate bonds that respect ESG logic. Globally, it should be noted the assets managed by investment funds from January to October 2020 recorded net inflows of savings of more than €150 billion, eighty percent more than the same period in 2019. In the Eurozone (Chart 1) we can see that the share invested in ESG funds has more than tripled, with a preference for equities and fixed income securities.
If the initiatives of private investors are growing both in size and in number, it should be recognized, however, that the role of Institutions, especially International ones, is of fundamental importance, as they take the lead role of the entire market, conditioning private initiatives; among the Institutional motivations there is certainly the obligation to achieve the 17 Goals for sustainable development set in 2015 by the United Nations in the UN 2030 Agenda. In addition, as highlighted by Fabio Panetta, member of the Executive Committee of the ECB, on the occasion of the 50th anniversary of AIAF (Italian Association for Financial Analysis) "it is unrealistic to imagine that the huge volume of investments necessary for sustainable development can be realized without the intervention of the public sector, in order, for example, to raise the price of carbon by strengthening the emissions trading system or to support research and development of alternative energy sources. Whether investment programs of this scale can be implemented will depend on the cost and availability of financial resources. A lower cost of capital than traditional investments - the so-called green premium - could stimulate the initiation of sustainable projects."
However, it should be pointed out that some problems have arisen due to the introduction of ESG criteria, as these ratings for individual companies drawn up by various analysts refer to non-homogeneous methodologies and are poorly correlated, generating confusion and uncertainty among investors; the resolution, especially of a regulatory nature, of these problems would encourage even greater use of these criteria, helping their development and diffusion on a national and international scale.
Written by Giorgio Costa of the VGen Finance Hub
