Why ESG and impact investing matters more than ever
If anything, the events of the past few years have taught us is that ESG investing is more important and critical than ever before.
The war in Ukraine, Covid-19, and climate change underscore the need for a sustainable investing.
ESG investing refers to investing which seeks to evaluate and optimise investments in companies based on environmental, social and governance criteria and metrics.
Impact investment is usually an additional exclusion methodology after ESG analysis and involves assessing investments on their ability to generate positive, measurable social and environmental impact plus a positive return on capital.
ESG covers as a wide variety of factors including
ADEC Innovations, 2022
Some of the hot topics in ESG now include a company’s ability to mitigate climate change and reduce CO2 emissions, human rights in supply chain management, attention to Modern Slavery issues, and workplace diversity and equal opportunities.
The events of covid-19 and (more importantly) the Ukraine have also shown a need to look beyond company specific measures and evaluate the environment in which the company operates and Government ESG ratings for countries where a company does business.
Government ESG ratings have been traditionally used by buyers of bonds to assess rick factors, however they are increasingly likely to be also used by retail and sophisticated investors as part of an ESG analysis for individual companies.
MSCI produces comprehensive ESG Government ratings that include analysis of the following:
Russia was downgraded from a BBB to a B on the 28 February and was further downgraded on 8 March to a CCC, the lowest rating possible.
The Ukraine situation has highlighted companies do not operate in isolation of the country or environment in which they operate.
Felix Boudreault, managing partner at research firm Sustainable Market Strategies concurs “as an investor, you have to consider not just the company, but the environment in which they operate. And we are saying the same about China. Its uninvestable from any ESG perspective. By a strike of a pen, a bureaucrat can wipe out an entire sector – like they did with education technologies recently”.
What has been interesting is how quickly stakeholders (investors, customers, employees) have responded to the crisis by pushing boards to do more and to punish publicly those not seen to be doing enough.
The Yale School of Management’s Professor Jeffrey Sonnenfield has compiled a list of over 300 companies to have withdrawn from Russia since the war and publicly applauded their actions.
On the other side of the equation, social media has been quick to denounce companies that have remained in Russia. This presentas major reputational risk for Boards of companies who do not act quickly enough on stakeholder concerns.
EY recently produced figures showing over 72% of investors say they conduct a structured, methodical evaluation of non-financial disclosures – a huge leap from 32% in 2018.
Impact investing coupled with ESG analysis look to be set for a very bright future. Capital allocation can make a difference. Just ask the board of Exxon Mobil which was altered in 2021 after a small ESG investor led an activist push for more action on climate change.
Here in Germany, we are seeing a huge surge in ESG investing. In 2020 ESG investments rose to €1.7 trillion in Germany and Austria – a 400% increase over 5 years.
Many Australian listed companies are dual listing in Germany to assist engage with European ESG and impact investors. Below are several ASX listed companies that have dual-listed in Germany with high ESG credentials that could be worth further investor research.
Several ASX (dual-listed Germany) with strong ESG credentials
European Metals Holdings Limited (ASX: EMH; FSE: E86)
European Metals Holdings is developing Europe’s largest hard rock lithium resource with a strategy to develop an integrated mine and lithium processing plant in the Cinovec region in the Czech Republic The goal is to develop secure, sustainable lithium hydroxide to Europe’s EV Battery Gigafactory’s.
The strategy includes the use of solar power, an electric mining fleet, and use of green hydrogen for thermal power. The mine is set to be 100% renewable energy.
The Executive Chairman, Keith Coughlan, says “Cinovec has the potential to have the lowest overall environmental impacts compared to other conventional lithium battery metals projects not only in Europe but also on a global basis”
Nimy Resources limited (ASX: NIM; FSE: P4G)
Nimy Resources Limited (ASX:NIM; FSE: P4G) is an ASX listed and dual-listed in Germany, Nickel explorer based in Western Australia.
The company has a strategy to explore for, extract and supply responsibly sourced and premium-priced nickel, with minimal impact to the environment and consultation and engagement with local communities.
Nimy resources is a first mover in a major new Nickel Sulphide belt covering a land area of 1,761 sqkm in a Tier 1 resource. Nimy resources has an extensive exploration program planned to explore and develop a pipeline of targets.
Nickel is key component of lithium-ion batteries and energy storage systems. At present this accounts for around 7% of demand. This is expected to grow to 30% by 2030.
Wide Open Agriculture (ASX: WOA; FSE: 2WO)
Wide Open Agriculture (ASX: WOA; FSE: 2WO) is the only listed regenerative agriculture company in the world dedicated to a “4 returns” philosophy. The company’s constitution recognises the importance of delivering meaningful and measurable returns across four key areas – financial, social, natural, and inspirational.
The company is tapping into the growing consumer desire to find out more about the food they consume – who grows it? How is it processed? What is the provenance? On the company’s branded food website consumers and stakeholders can trace the journey of the Oats from farmer to processor to warehouse to sales/distribution.
Wide Open Agriculture is developing a global strategy around carbon neutral oat milk (“OatUp”) and plant-based foods and drinks made from modified lupin protein. The profit plus purpose philosophy is developing well with full year revenue for 2021 financial year increasing by 198% to AU $4.3 million and the business recoded its eighth consecutive quarter of growth to June 2021.