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The evaluation of economic and financial indicators is a basic requirement for investment analysis and the corporate credit. Without disregarding the importance of these figures, the ESG phenomenon has brought complementary metrics to the center of analysis, making it possible to control long-term risks and take a global view.
This acronym has probably crossed your “timeline” in recent months. It refers to a set of environmental, social and corporate governance criteria used to evaluate companies and assets. It acts as a seal of quality, distinguishing the adoption of good practices in each of these spheres.
The term ESG emerged in 2004 as a result of dialog between international organizations and financial institutions. A milestone was the definition of 17 UN initiatives for sustainable development that have guided this movement
In the environmental dimension, good practices should look at carbon emissions, pollution and deforestation, among other sensitive issues. With regard to the social aspect, attention to diversity in team formation, data security, relations with the community in which the business is carried out and respect for human rights are highlighted. In turn, the governance dimension highlights internal control mechanisms, the composition and independence of the board and ethical commitment.
The design of ESG metrics ends up being a decentralized process, defined by the investment manager or credit assessment committee, but the criteria established in international treaties are increasingly taken into account. One example is the Paris Agreement, signed in 2016 with the aim of limiting the rise in the planet's temperature. In the view of the Global Sustainable Investment Alliance (GSIA), even though it is a treaty between countries, a growing number of investors are seeking to align their portfolios with the purposes of the agreement.
The ESG concept serves the company's image, but it goes much further than that. It opens the door to accessing financial resources, whether via the capital market or the credit market. Data from the Global Sustainable Investment Alliance“ show that at the beginning of 2020, the total stock of ESG investments reached US$ 35 trillion in the markets of Europe, the USA, Canada, Australia and Japan. According to the document, this figure already represents 36% of assets under fund management.
In the economy, incentives matter. The ESG trend could promote, on the one hand, the redirection of financial resources to companies aligned with the major issues of the 21st century. On the other hand, it could induce a change in the behavior of companies that demand resources, seeking a competitive advantage through sustainable operations.
In Brazil, the term has only recently become popular. Google Trends figures show a significant increase in searches for “ESG” throughout 2020. It could be said that, in the last year, the acronym has finally established itself in the Brazilian corporate vocabulary, although it had already appeared before.
The 2018 Sustainability Survey, carried out by ANBIMA, showed that 11% of the responding asset managers indicated that they had a specific ESG area. In addition, 231 PT3T said they had committees or employees directly involved with the issue, even without a specific area. Despite the low percentages, 48.51% of the respondents said that their company had a document on responsible investment policies.
Beyond the image benefits and access to resources, it would be difficult to imagine the success of this strategy if the adoption of best practices compromised business profitability. In this case, the flow of resources to companies adhering to the strategy ESG would tend to cease.
Most of the empirical evidence shows that ESG practices are related to better long-term results, guaranteeing returns for investors and reducing credit risk. The logic is that a commitment to environmental, social and governance criteria prevents companies from suffering reputational damage and long-term risks, resulting in losses for the business.
The ESG impact on capital markets is already a reality and is beginning to participate in the financial market. In addition to the efforts of private entities, there are also measures being taken by public sector bodies. In September 2020, the Central Bank included the sustainability pillar in the BC# Agenda, with the aim of seeking better management of socio-environmental and climate risks in the national financial system. One of the initiatives of this pillar is the Green Bureau for rural credit, to identify all the productive areas benefiting from this type of credit, as well as the creation of a score for rural producers' adherence to sustainability criteria.
With a key role in credit assessment, the credit bureaus are aware of the social impact of their activity. More than supplying the market with information for decision-making, the sector promotes debt renegotiation and fosters financial education through various initiatives.
Also noteworthy is the sector's active participation in discussions on legislative matters, such as the General Data Protection Law (LGPD), and support and investment in the implementation of the Positive Registry.
The credit bureau sector believes that ESG criteria are gaining ground in credit assessment, contributing to sustainable and inclusive development, promoting the democratization of credit, oxygenating the economy and bringing social well-being.
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By: Elias Sfeir President of ANBC & Member of the Climate Council of the City of São Paulo & Certified Advisor
