In recent years, the growing attention towards issues such as climate change and gender equality has been driving a radical change in the investment market. Businesses are taking charge of the impact they are creating on the environment and society. Due to this, investors around the world have started to evaluate organizations not only on the basis of their financial performance but also on the basis of their environmental, social and governance (ESG) risk mitigation practices as a part of their investment process.
ESG are not just ethical elements that businesses should follow to portray a good image. With the increasing evidence of ESG practices having financial implications, the wave has turned. In many markets, including the U.S. and the E.U., ESG integration is gradually seen as part of fiduciary duty[1]. Recognizing the vital role of ESG in achieving the ultimate goal of any business i.e. profits, both the corporate community and the investors across the world have started to consider it as an investment, rather than a cost. More and more investors and investment managers are signing up to the United Nations-supported ‘Principles for Responsible Investment’ every year, which works to understand the investment implications of ESG factors for developing a more sustainable global financial system[2].
The indications of investors’ growing concerns regarding the company’s ESG practices is becoming stronger day-by-day. With the rising need for capital in the country, the government, as well as the Nepalese private sector, are taking steps to attract Foreign Direct Investments (FDI). However, along with other initiatives, companies should also start aligning their business practices according to the investor’s ESG requirements to capture investors’ complete attention[3]. These investors analyze more than just the company’s financial statements to identify ESG issues for both risk mitigation and value creation opportunities.
In May 2018, the International Finance Corporation (IFC) partnered with Nepal Rastra Bank (NRB) to support and improve the environmental and social risk management (ESRM) practices for Banking and Financial Institutions. Many times, B/FIs are exposed E&S risk through their clients and when these risks are not managed on time, it could lead to hampering their reputation and declining revenue. The objective of this guideline is to help B/FIs integrate Environmental & Social risk management into the overall credit risk management process in order to fully inform the credit authority of E&S risks prior to the financing decision regarding individual transactions[4]. Even if it’s not for equity investors, getting a loan from local commercial banks will also require businesses to meet the required ESG standards. Some of the commercial banks have already begun restructuring along with asking borrowers to comply with ESG requirements[5].
The government of Nepal has been drafting ESRM framework in collaboration with development partners for various projects to identify and avoid adverse environmental impacts in the project cycle. The concerns regarding decent ESG risk mitigation practices can be clearly seen from the government’s and Development Finance Institutions’ (DFI) side. It’s high time that the Nepalese private sector also complies with it.
Moreover, ESG practices can be beneficial for the company’s corporate environment as it can lead to improvement and harmonization of management practices. With the ongoing trend, ESG isn’t just nice-to-have factors, but rather something shareholders, as well as stakeholders, will demand. Alongside, companies could also gain an advantage over their competitors by integrating ESG risk mitigation practices. A recent IFC study states that companies with good environmental and social practices outperform companies with worse E&S practices by 210 basis points on return on equity (ROE)[6]. The ESG ecosystem is still young, however, it won’t take much time to become a mainstream application for businesses.
References:
[1] Georg Kell, “The remarkable rise of ESG”, July 11, 2018 https://www.forbes.com/sites/georgkell/2018/07/11/the-remarkable-rise-of-esg/#493462d81695
[2] Principles of Responsible Investment https://www.unpri.org/pri/about-the-pri
[3] Shabda Gyawali, “Capital shortages reveal opportunities for ESG-aligned businesses”, August 14, 2019 https://dolmaconsult.com/services-category-detail/capital-shortages-reveal-opportunities-for-esg-aligned-businesses-134.html
[4] Nepal Rastra Bank, “Guideline on Environmental & Social Risk Management (ESRM) for banks and Financial Institutions”, May 2018 https://www.nrb.org.np/bfr/directives/Guidelines–Guideline_on_Environmental_&_Social_Risk_Management_for_Banks_and_Financial_Institutions_2018-new.pdf
[5] Shabda Gyawali, “Capital shortages reveal opportunities for ESG-aligned businesses”, August 14, 2019 https://dolmaconsult.com/services-category-detail/capital-shortages-reveal-opportunities-for-esg-aligned-businesses-134.html
[6] International Finance Corporation, “The Business Case for Sustainability” https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/sustainability-at-ifc/business-case
Thumbnail picture source: https://www.theactuary.com/news/2019/12/esg-now-top-priority-for-millennial-investors/
