For investors, ESG investments are proven to be:
Higher in resiliency
During the beginning of the COVID-19 pandemic, numerous global ESG funds outperformed the classic indices, such as S&P 500. Driven by strong governance systems and inclusion of wider environmental and social risks that may have not been included by others, ESG investments were able to absorb the shock of the pandemic, proving them to be resilient in the time of crisis and able to create value in the long-term.
More competitive in returns
Strategic and operational inclusion of ESG principles can lead companies to cut costs, increase efficiency, and direct capital towards investments (machinery, business expansion via acquisition, etc) that are sustainable and able to create value in the long-run, which creates significant improvements on their financial performance and higher returns for investors.
Simple to integrate into the portfolio for diversification benefits
More tools are increasingly becoming accessible to support investors in making ESG investment decisions, ranging from ESG ratings published by specialized rating agencies, to ESG-focused indices launched by IDX.
Companies obtain a range of benefits from incorporating ESG principles into their strategic and operational agenda, including:
Safeguarding their reputation
With increasing concerns over environmental and social issues, companies can protect their reputation by showing a strong commitment towards integrating ESG practices in their strategic and operational agenda. This is commonly supported by making periodic ESG disclosures, such as publishing sustainability reports, using globally recognized standards. This will strengthen the trust between companies and their investors, as well as other stakeholders.
Managing and seizing long-term risks and opportunities that may have been overlooked.
ESG risks, which can range from lack of environmental management, community conflicts, to regulatory changes, are often overlooked because they are not as easily quantifiable as traditional financial metrics. But as these issues become more critical and their effects become immediate, companies need to implement a strong risk management system that identifies, measures, and responds to these ESG risks accordingly.
Similarly, ESG also presents opportunities for companies to unlock. The implementation of strong ESG practices can boost efficiency, reduce costs, increase worker productivity, and foster innovation. Companies can expand into areas with growth opportunities, such as new technologies or clean energy.
Aligning with investor demands.
As the COVID-19 pandemic struck the world, investors are rapidly realizing the importance of resiliency in the face of crisis and have begun directing their capital towards investments that create positive financial, social, and environmental impact in the long run. Companies can attract more investors by implementing and regularly disclosing their ESG initiatives and can also enjoy the additional benefit of retaining long-term investors, as ESG-focused investors commonly aim for value creation in the long run.
Preparing for regulatory changes
Regulators in many jurisdictions have begun introducing regulations to encourage sustainable finance and investing, which often takes the form of mandatory periodic ESG disclosures. In Indonesia, OJK has already published OJK regulation No. 51/POJK.03/2017 on the Implementation of Sustainable Finance for Financial Service Companies, Issuers, dan Public Companies and the Sustainable Finance Roadmap Phase II (2021-2025). In the future, we can expect the capital market regulators to introduce more comprehensive regulations regarding ESG principles to support the shift towards sustainable finance. By proactively embracing ESG into their business, companies are better prepared for the changes within the regulatory landscape, and can even gain a competitive edge among its peers.