Ten years ago, when people talked about ESG (Environmental, Social, and Governance), it was considered that this investment could provide a market return. But since then, and after the great financial crisis, we have realized that it adds returns in the medium term. After all, including non-financial criteria is about achieving more efficient risk management, and avoiding the most extreme risks.
The Paris Agreement in 2015 was the trigger by which the various risks associated with climate change, among others, began to be considered. The United Nations (UN) established the Sustainable Development Goals (SDGs), a series of criteria on ethics and sustainability, with which they sought to raise awareness among companies, understanding that there are some that can become cross-cutting.
So, in any case, even for the same profitability as traditional management, it leads to better risk management, as well as diverting capital towards more sustainable companies. In any case, the industry has long been immersed in socially responsible investing. Investors will now have at their disposal vehicles that are self-rated ESG and others capable of providing measurable impact reports.
Meeting Sustainability Criteria: a Profitable Choice for Companies and Investors
Leading sustainability companies have more robust and higher quality margins, according to the Foundations of ESG investing study developed by MSCI, a global benchmark stock index, which analyzed more than 1,600 companies over 10 years.
Basic ways to improve margins are offering solutions to sustainability challenges and aligning the company's interests and expectations with those of society. Through the use of resources, if the company advocates environmental protection, there is less consumption of raw materials, because this is more efficient.
This type of management allows companies to reduce exposure to market risk. Reducing, for example, a company's carbon footprint allows it to be prepared for a possible transition to a renewable energy economy. Moreover, as there has been an increased interest in companies applying these criteria, the fact that they are part of the company's position can generate a valuation premium for them on the part of the investor.
On the investor side, as investors align their holdings with ESG criteria, the drivers of performance are changing, as Bank of America's report notes. Globally, the strongest alpha-generating signals have shifted from social factors, such as community relations and occupational health and safety, to environmental factors related to carbon emissions.
Gradually, companies are joining this shift that many professional investors have been demanding. In particular, three quarters already take ESG factors into account, according to a Natixis survey. Also, the assets of domestic investment funds that follow ESG criteria have increased, currently standing at EUR 42.574 billion, according to Vdos, 13.7% of all funds. In the first half of 2021 alone, it has increased by 6,305 million euros or 17.38%, as reported.
The Fashion Companies Setting the Bar for ESGs
Nike and LVMH have positioned themselves among the fashion companies best prepared to "take advantage of ESG disruption", according to GlobalData.
The assessment comes from GlobalData's Thematic Research Ecosystem, which ranks companies on a scale of one to five according to their likelihood of overcoming challenges such as ESG and emerging as long-term winners in the fashion and accessories industry.
The consultancy firm has presented a list of the fifteen industry players best positioned for this shift in consumption, giving a rating from 1 to 5 according to their level of readiness. Nike, LVMH, Kering, Bestseller, Inditex, Marks & Spencer, Fast Retailing, H&M, and C&A received a rating of 4, the highest rating any company has ever received; and Foot Locker has a score of 3, completing the top 10.
Specifically, the criteria for rating these companies are selected based on their ability to meet challenges such as ESG and become long-term winners in the fashion and accessories sector, as explained by GlobalData.