Four ESG themes investors should be aware of right now

14 June 2018

We’re often asked about the most important ESG themes that investors should consider. As bottom-up, active managers, we unsurprisingly tend to focus on those issues that are most material for each investment case. That said, there are several overarching ESG topics that we believe are increasingly important for investors to be aware of right now.

1) Carbon Disclosure – pressure to improve

ESG Climate change

Climate change is perhaps the most obvious theme, due to the broad consensus around the need for large-scale concerted action. We expect this to remain a significant focus in 2018 and beyond, with major debates – including around divestment and stranded assets – certain to rumble on. From an investment perspective, a major challenge so far has been the lack of consistent (and relevant) climate change reporting by companies, in turn complicated by absence of measurement standards (dealing with emissions classification, potential double counting etc.). The good news is that this is changing, thanks in no small measure to initiatives like CDP (formerly the ‘Carbon Disclosure Project’) and the Task Force on Climate-related Financial Disclosures (TFCD). Indeed, last year saw the publication of the TFCD’s high-profile recommendations. These provide a very useful framework for companies – structured around ‘Governance’, ‘Strategy’, ‘Risk-management’ and ‘Metrics and targets’ – making sure that the information reported is ‘decision-critical’ for investors.

2) Cybersecurity – an increasing threat

ESG Cybersecurity

Another ESG issue that should be at the forefront of investors’ minds is cybersecurity. Last year saw no let up in major attacks, illustrating the growing sophistication of hackers. Besides spending more on their cyber defences, we believe companies will increasingly question the risk/reward of holding certain data, not least due to more stringent regulation. The most significant development here in 2018 is the introduction of the European Union’s General Data Protection Regulation (GDPR), which European companies must comply with by the end of May. The GDPR is not without bite – failure to comply can lead to fines of up to €20 million, or 4% of annual group turnover (whichever is larger). In addition, companies will be required to report data breaches within 72 hours of discovery. Cybersecurity is an important area for our research and company engagement and a reason why we are involved in a collective initiative co-ordinated by the PRI.

3) Sustainable Development Goals (SDGs) – a growing focus

ESG Sustainable Growth

We also need to mention just how important the United Nation’s Sustainable Development Goals (SDGs) are becoming to asset owners and the fiduciaries they employ. We are increasingly seeing these incorporated into reporting frameworks, with the sizeable number of goals (17) and sub-targets (169) organised on the grounds of materiality. Indeed, while some of the goals may only have a tenuous link to business activity, many are directly investable. From a risk perspective, we believe that companies whose business models conflict with the SDGs risk eroding their licences to operate. Conversely, those businesses that take a proactive approach to sustainability are likely to strengthen their competitive positions.

4) Sustainable finance – moving into the spotlight

ESG Sustainable Financial System

Finally, with the recent publication of the European Commission’s High-Level Expert Group (HLEG)’s final recommendations on how to create a sustainable financial system, we can expect to see much greater transparency of companies’ ESG policies as well as investors’ duties regarding sustainability. Specifically, HLEG has proposed a clearer taxonomy around sustainability. Notably around investors’ obligations when it comes to creating a more sustainable financial system and better disclosure as to how sustainability features in decision making for investors and companies. In our view, this is a very significant report as it will feed directly into the Commission’s ‘Action Plan’ on sustainable finance, thus having a real impact on policy in the coming years.

This article has been taken from our 2018 Stewardship Annual Report. Please see the links to the full report.

Important information

This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice. It has been complied with considerable care to ensure its accuracy. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Martin Currie has procured any research or analysis contained in this presentation for its own use. It is provided to you only incidentally and any opinions expressed are subject to change without notice.