Between skyrocketing inflation, bear markets galore, and geopolitical instability in both Europe and Asia, environmental, social and governance-based issues have fallen down many investors’ and companies’ list of priorities. However, as some semblance of stability begins to return to the markets in 2023 and mere capital preservation takes a back seat, the relentless ascent of ESG will surely resume in earnest. And despite over 70 percent of surveyed retail investors stating that ESG scores are an important factor for them when making investment decisions, many people are still unaware of what this latest buzz phrase even means.
Well, environmental, social and governance – or ESG for short – encapsulates a range of factors but, fundamentally, it represents a corporate paradigm shift away from mere short-term profit maximisation, towards a more sustainable business model that considers the environment, employees, the supply chain, and the broader community. Ever since the emergence of its predecessor CSR, corporations have been under intense pressure from both investors and regulators to improve their performance and, with Net Zero 2050 and Biden’s Green New Deal, this pressure is intensifying year after year.
Even if you aren’t personally sold on ESG, all the data suggest that strong ESG scores will be closely correlated with share price growth in the future. In this article, we’ll look at some of the key existing and emerging sectors when it comes to ESG-minded investment, as well as the changing regulatory framework and what it means for companies in the medium to long term.
Make green by being green
Whenever we think of ESG strength, there are several sectors that immediately spring to mind. Perhaps the most well-known of these would be renewable energy, non-ICE vehicles, and advanced recycling. We will all surely remember the unbridled growth in the share prices of such companies as NextEra, Enphase, Tesla, and Carbios in the year following Joe Biden’s ascension to the White House and subsequent announcement of his Green New Deal. This policy pledged to do away with fossil fuel subsidies, with an ambitious aim of reaching 100 percent clean renewable energy by 2035. Sadly, it seemed that many investors in the space forgot the central mantra of ESG, namely that it is a marathon and not a sprint. The valuations and P/E ratios of these companies and many like them shot up to unsustainably high levels and a bubble inevitably formed. Now, even financially sound examples like Tesla are nursing losses of over 60 percent from their November 2021 high.
But this doesn’t mean that the traditional ESG sectors are dead ducks. On the contrary, their post-crash prices could represent excellent value for money. Indeed, recent research from J.P. Morgan Asset Management has shown that capital inflows into the renewables market alone have grown by almost 1,000 percent in 15 years, rising from $33bn to $310bn. This speaks of an underlying long-term trend independent of the ups and downs of boom-bust cycles. Furthermore, this category of assets is constantly expanding, with the recent addition of carbon offsetting/credits offering an exciting future avenue for investors to participate directly in the race to net zero. For now, this space is very difficult for retail investors to access, but we are expecting dedicated ETFs along the same lines as the iShares MSCI ACWI Low Carbon Target ETF (CRBN) or BlackRock’s US Carbon Transition Readiness ETF (LCTU) to emerge in the coming years.
Crypto clean-up on the cards
Another relatively new asset class that has been enjoying massive growth both in price and investor interest is crypto. Despite being a favourite of traditionally more environmentally conscious younger generations, digital currencies are in fact extremely power intensive. The original cryptocurrency, Bitcoin, for instance, consumes more electricity in a single year than Sweden, Norway, or the United Arab Emirates – and the majority of this energy use is attributable to mining operations. However, the rise of ESG and threat of future regulation has led to an increase in the number of green mining companies, with at least 29 miners now using 90–100 percent zero-emission energy to power their farms.
At Libertex we have always strived to be responsible, ethical, and sustainable in everything that we do
In fact, there are some even more forward-thinking operators, such as Vespene, which is actually reversing the damage caused by methane pollution by converting the gas into electricity which it then uses to mine BTC. Mining using methane-vented power is far more effective at reducing carbon emissions than any other renewable energy source we have and mining with this method actually removes 13 times more emissions from the environment than coal puts into it.
And yet, the process of mining cryptocurrency needn’t be anywhere near as power hungry as this at all. The problem with Bitcoin lies in its frankly outdated Proof of Work (PoW) method of block calculation. Proof of Stake or PoS models like Ethereum (ETH), Solana (SOL), Polkadot (DOT) and Avalanche (AVAX) are much more energy-efficient and faster than their PoW counterparts. There is a seemingly ESG-motivated campaign to switch BTC mining from PoW to PoS known as Change the Code Not the Climate, which estimates that such a move could reduce Bitcoin’s carbon footprint by up to 99 percent.
Given the pressure from governments and supranational organisations – as well as the advent of financially-punitive measures for heavy polluters – Bitcoin may well be forced to make the change if it is to maintain its position as the primary digital currency in a net zero world.
Regulation, regulation, regulation
For most of its relatively short history, ESG and CSR have been largely opt-in, consisting predominantly of initiatives that companies have chosen to run for improved image or PR capital. But now marks a watershed moment as more and more countries begin to introduce actual legislation aimed at formalising corporate responsibility. The EU, for instance, is expanding its 2020 Taxonomy classification to require affected companies to report on their economic activity’s alignment with all six of the Taxonomy’s sustainability objectives. However, the German government has now gone beyond environmental concerns with the passing of its Supply Chain Due Diligence Act in what could be the first of many bills of its kind in Europe and worldwide.
The new law will require all businesses operating in the world’s fourth largest economy to ensure that their entire end-to-end supply chain is free from both environmental and human rights violations. This is key because it means that companies can no longer plead ignorance to what goes on above them in the supply chain: it is now their obligation to verify that everything they source was produced ethically.
And this is just the tip of the iceberg when it comes to hard ESG regulation. This year has also brought the EU Parliament’s highly perspicuous Corporate Sustainability Reporting Directive (CSRD) and the UK FSA’s equivalent Sustainability Disclosure Requirements (SDR), with many other jurisdictions set to follow suit in short order. As such, it is soon going to be virtually impossible for any sizeable business to operate without first implementing a sound ESG strategy to comply with the growing body of legislation.
And given mounting pressure from both ordinary consumers and institutional investors for higher ESG scores, it would be wise for companies to take steps now, so as to both stay ahead of the regulation and win the hearts and minds of their customers and potential stockholders. Meanwhile, with pay-to-pollute carbon credits on the horizon, minimising their environmental impact and emissions will go a long way towards maintaining a healthy bottom line in the near future. This will be especially important for the long-term profitability of less environmentally friendly industries like oil and gas or chemicals, for instance.
Think global, act local
The exciting thing about ESG in the modern age of business is that it will ultimately affect everybody – and that’s a good thing. This philosophy is why at Libertex we have always strived to be responsible, ethical, and sustainable in everything that we do. From the underlying assets we provide and promote to our own actions as a company.
Beyond the instruments we offer, Libertex is engaged in a number of independent charitable and sustainability-driving initiatives which form the crux of our internal ESG strategy. Our most recent charity involvement is with the ‘Hope For Children’ CRC Policy Centre (HFC), as part of which we have not only pledged financial aid but also cooperated on joint actions to protect children’s rights.
When it comes to employee satisfaction, Libertex has also earned high distinction in the form of its Great Place to Work certification awarded in December 2022. During the rigorous evaluation process, 96 percent of our employees stated that Libertex is a ‘great place to work’ – one of the highest percentages recorded by GPTW in recent years. Local initiatives like these can be undertaken by any company and often generate the best returns – and as ESG becomes obligatory in Europe and beyond – they will be increasingly linked to profitability and the ability to attract investment.