The Necessity of ESG Initiatives Comes to the Fore

The number of investments in environmental, social and governance (ESG) initiatives is increasing every year. In 2023, about 60% of European assets under management were invested in funds or strategies focused on ESG and sustainability. According to a survey, more than half of investors plan to increase investments in ESG this year, so the upward trend will continue to take place in 2024. 

The term ‘ESG’ was introduced in 2004 in the report from the United Nations, “Who Cares Wins”, and immediately became mainstream. Since then, ESG has held its ground and is steadily reinforcing its influence. What is the reason for ESG to become such a significant trend? Let’s figure it out. 

The need for socially responsible investing

It's essential to delve into the current importance of ESG. In the contemporary world, overlooking the environmental agenda or neglecting principles of inclusivity and diversity in the workplace is no longer an option. The global community has recognized the imperative for sustainable investing.

Failing to adjust to the current paradigm means being unable to conduct the business. Thus, companies are introducing products that incorporate sustainability considerations, catering to the demand from clients seeking products with a more detailed emphasis on E, S, and G factors.

In contrast to the traditional investment strategy that revolves around a company's financial indicators, ESG presents a distinct narrative. ESG investing implies prioritizing the analysis of how a business aligns with environmental, social, and governance factors before financial indicators. Essentially, ESG investing focuses primarily on making socially responsible decisions rather than solely pursuing financial gains. 

Benefits of ESG investing

Different studies demonstrate that firms that actively adhere to the ESG principles achieve greater success, surpassing their counterparts across all significant performance measures. In adopting this perspective, modern investors have recognized that investing in a sustainable future is not just a matter of ethics but also a wise financial strategy. 

Aligning with ESG principles not only allows to enhance performance, but also to expand. A robust ESG proposition enables companies to explore new markets or adapt to changing market conditions. When regulatory authorities have confidence in corporate entities, they are more inclined to open up new avenues for those companies to grow. This also applies to the local administration; due to proper ESG initiatives, businesses have an opportunity to benefit from subsidies and government support.

Given the bright side of socially responsible investing, it becomes clear why the potential of ESG is being actively realized, and the figures increase at a comparatively high CAGR. According to the research, ESG-mandated assets are projected to make up half of all professionally managed assets globally in 2024. With these statistics in mind, it can be asserted that there is no undervaluation of ESG.

Are there any impediments to ESG investments?

Despite this positive image around ESG investments, global events can act as blockers for the development and influence of ESG initiatives. During various periods, one of the letters (either E, S, or G) may take precedence. For instance, prior to Covid-19, the primary interest was in the green agenda. However, with the beginning of the pandemic, the emphasis on the environment did not vanish but rather receded into the background. One example of this was the urgent need to produce millions of masks prevailing over the addressement of issues like waste and plastic pollution.

Today, we observe a crisis of a different kind – geopolitical – kind, accompanied by the emergence of new conflict spots. In recent years, we can even say that geopolitics has become the other sense of the letter G in ESG. As political instability creates potential sustainability risks, the commitment to ESG becomes more and more obligatory. Moreover, in some countries, corporations are compelled to adhere to ESG principles at the governmental level. Thus, considering evolving threats, companies begin harmonizing their ESG policies with the need to also address geopolitical risks.

Continuing to unlock the potential of ESG in 2024

In 2024, if a business does not adhere to the principles of ESG, then both funds and private investors most likely will not invest in it. This, once again, leads to the сonclusion that there is no underestimation of ESG, and the necessity of its principles being established only grows. 

2024 will be the year of tackling environmental issues, and green economy initiatives will see active development during this period. Importantly, one of the main goals will be greenwashing eradication this year. This implies diminishing the number of abstract and misleading environmental sustainability efforts and claims and striving for a more precise formulation of actions and policies.

Summing up, this year, businesses will have another chance to reconsider their processes and make them consonant with the ESG principles. This transformation will help corporations stay competitive, fit into current trends, and advance their operations, complying with improved risk management practices.