Published in Cyprus Mail 8/08/2023

ESG Investing – Green is the new Black.

While probably not the new kid on the block, ESGs are the hottest and indeed getting hotter. Geared to contribute to reverse our planet heating up.

A comprehensive approach on three pillars Environment, Social and Governance – that companies are expected to report, particularly on financially material issues that can impact a company’s financial performance. Double materiality is being recognized as an increasingly important concept, i.e. the socially material issues alongside financially material issues are also treated as material. The goal in essence is to capture all non-financial risks and opportunities of business activities and relate them practically to the fate of planet earth.

It is based on a simple philosophy. For change, any change to happen, we need to put our money where our mouth is. Or literally where our values are. When the stakes are high and the targets bold, proclaiming lovely goals simply won’t cut it. It takes concerted efforts, investments, and monitoring for alignment. Enter ESGs and sustainable finance.

Effectively it all started in April 2021 with the European Commission adopting the Sustainable Finance Package inclusive of a proposed Corporate Sustainable Reporting Directive (CSRD) effective from 2024. The CSRD is reforming and increasing the scope of reporting required compared to the Non-Financial Reporting Directive (NFRD), the current EU sustainability reporting framework. The increase in scope practically means that from 2023 almost 50,000 companies in the EU will now have to report on ESG issues from around 12.000 companies currently.

Interestingly, a group of investment and sustainable investing groups with more than 90 asset managers called on the European Commission in a joint statement issued in July 2023 to reconsider its recent proposed changes to the European Sustainability Reporting Standards (ESRS), which would ease several aspects of the EU’s upcoming CSRD, as the changes proposed by the EC would impact investors’ ability to obtain sustainability-related information required for investment decisions, on top of reducing their ability to meet their own reporting requirements, including those under the EU’s Sustainable Finance Disclosure Regulation (SFDR), with similar concerns being raised from Banking Association AFME.

ESG elements are increasingly incorporated into investment decisions and are used to screen investments based on corporate policies and encourage companies to act responsibly, making ESG reporting even more important for securing debt and equity capital. The UK is making clear ESG is part of fiduciary duty and climate reporting must be embedded in investment.

Sustainability-linked debt is emerging as one of the fastest growing areas of sustainable finance, with corporate interest in sustainability-linked loans growing rapidly over a Green Bond alternative where raised funds can only be allocated to specific categories of green projects vs. SLB’s financing where the financing provides flexibility to use the proceeds for general corporate purposes. Take your pick. Aeroporti di Roma completed a new 10-year €400 million sustainability-linked bond (SLB) with the cost of debt on the bond tied to a series of the airport operations group’s climate related goals. Demand on the offering was strong – nearly 5 times oversubscribed generating significant international interest, especially from ESG investors, and overwhelmingly from foreign investors. Tokyo-based Mizuho announced a new goal to facilitate $700 billion in sustainable finance to 2030 of which half in environment and climate-change-related finance.

Singapore’s Sustainability Reporting Advisory Committee (SRAC) launched by the regulators proposed that all public and private companies be required to provide climate-related disclosures beginning 2025, aligned with IFRS’s newly published disclosure standards. The proposal for mandatory climate reporting by all listed issuers, including those incorporated overseas and non-listed companies, aims to maintain Singapore’s position as a global business hub and contribute to the Singapore Green Plan 2030. According to the SRAC Chairperson Esther Ann, climate strategy and reporting can help companies to mitigate and adapt to risks in the transition to a low carbon economy, as what is measured gets managed and climate reporting will help businesses to improve performance and create stronger competitive advantage by capturing growth opportunities.

Among the world’s largest institutional investors practicing sustainable green investing are the Government Pension Investment Fund (GPIF) in Japan, the Norwegian Government Pension Fund Global and the Dutch Pension Fund ABP, funds that are recognizing the long-term benefits of sustainable investing of improved shareholder value, reduced volatility, and better risk-adjusted returns. Since Q1 of 2022, investments in funds partly devoted to the environment increased by 3 times to $2 trillion, with such funds attracting $3 billion in investments a day.

Over the past two years, green sustainable investments have grown by more than 15% in value, accounting for one third of US assets under management. New equity funds raised by companies in the climate-tech sector totaled $119 billion in 2022 with experts though arguing that green investments must triple if we are to achieve the net-zero emissions goal of 2050. Bloomberg Intelligence has tracked ESG asset growth from $22.8 trillion in 2016 to $35 trillion in 2020 and projected to $50 trillion by 2025, add on that another $2.3 trillion spent on corporate R&D in 2021.

While we don’t know where the long game will find these investments and some will be winners while other losers like with any risk investments, research from McKinsey Global Institute and FCLT Global showed that there is significant gain from focusing on long-term value and green investments of 47% higher revenue growth and faster growing market caps.

The high levels of investments required to achieve net-zero emissions present an opportunity for investors to build on innovation and become leaders, yielding potentially big returns. By having a clear ESG innovation driven framework in place, companies can maximize on multiples of returns, for the long-term, and not only as frequently said, a conservative, financially stamped, ROI.

Are we there? Is the correct framework and mindset in place to maximize on this great opportunity? It is worth noticing that is not very often that we experience a cohesion, the whole and not the sum of the parts; consumers, employees, corporate leaders, governing and regulatory bodies, and of course investors, being in line with a bottom-up approach under a single one-word headline, ESG. Humbly, we are not there yet; we are not maximizing on the outcome of this impeccable opportunity to change things in volume and on a global scale.

What is Missing?

We strongly believe in the fusion of ESGs with the R&D and innovation strategies of each organization. A clear ESG innovation driven framework and understanding. A four-helix process -Evaluation Exploration, Collaboration, and Implementation- for an efficient ESG innovation driven strategy that will significantly capitalize on the opportunity, leverage on emerging innovations and technologies, with multiples of benefits to the environment and relevant stakeholders.

The Evaluation process checks and balances on whether the project meets the requirements for community/social, profit/financial, and environmental benefits. The exploration process consists in finding innovators and entrepreneurs, use cases and emerging technologies that can be included in the project to meet pre-established milestones. The Collaboration process will further expand the reach and will establish a co-creation environment and culture between innovators/entrepreneurs and employees. Finally, the Implementation process with everyone being under the same roof, common understanding, aligned with the time sensitive objectives and deliverables.

As Microsoft President Brad Smith put it, this is where the world is going, where the regulators are going and where the customers and investors are going.

In essence, where everyone, Cypriot companies included should be going. And as Cypriot banks will be evaluating customers based on ESG’s from 2024 with this evaluation affecting access to finance and interest rates, the route is turning into a one-way highway that can be supercharged with innovation.

By Dr. Nikolas P. Mastroyiannopoulos, Founding Managing Partner and Stavriana A. Kofteros, Founding Partner, W11 Ventures

About W11 Ventures

W11 is a unique boutique growth and innovation advisory firm, scaling startups and innovative companies, and a strategic connector of corporates with the innovation ecosystem, creating partnerships for the long run, with a proactive role geared to genuine value creation and growth. W11 offers end-to-end strategic and advisory functions, guidance and support to startups and innovative companies in the seed, startup, and scaling phase, looking for business development, capital raising, external growth or exit opportunities.

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