The Rise of Green Investments In The UK
The impact of ESG on FDI
Investment has always been a game of ‘risk and reward,’ and this is true for those investors who choose to invest for Environmental, Social and Governance (ESG) reasons.
In a system where accountability is key, and stakeholders, employees and consumers increasingly expect corporates to be answerable for their actions, there’s a growing risk of ESG-related litigation which could diminish the value of an investment in an instant.
Investors will be keen to find companies which have good ESG to minimise the risk of lost returns. In addition, businesses’ moral compass are driving where they choose to invest. This makes their reward ethical as well as financial.
It’s more important than ever that prospective investors conduct sound due diligence on the ESG credentials of their investments.
Investment has always been a game of ‘risk and reward,’ and this is true for those investors who choose to invest for Environmental, Social and Governance (ESG) reasons.
In a system where accountability is key, and stakeholders, employees and consumers increasingly expect corporates to be answerable for their actions, there’s a growing risk of ESG-related litigation which could diminish the value of an investment in an instant.
Investors will be keen to invest in companies which have good ESG to minimise the risk of lost returns. In addition, businesses’ moral compass are driving where they choose to invest. This makes their reward ethical as well as financial.
It’s more important than ever that prospective investors conduct sound due diligence on the ESG credentials of their investments.
In 2015, 193 countries adopted the United Nations Sustainable Development Goals (SDGs) which feed into ESG factors. They focus on goals such as sustainable cities and communities, gender equality, and decent work and economic growth. The SDGs are described as “the world’s plan to end extreme poverty, reduce inequality, and protect the planet by 2030.”
Consequently, they demonstrate a tangible outcome of focusing on ESG factors. By highlighting how a company’s actions feed into the SDGs, they’ll encourage investment, given such mindful investment will satisfy the requirements of stakeholders concerned about a company’s performance in this field.
It’s important for companies seeking external investment to maintain positive performance when it comes to their ESG credentials. However, while poor results are unlikely to encourage external investment, investment may be required by a poorly performing company to turn around their efforts in the ESG sphere – a good news story for an investor to share if their funds have assisted the turnaround. Comprehensive due diligence into how their investment will be spent is therefore advised.
If we look a little wider than investment due diligence, the supply chain is also an area where a company is best placed to ensure it has stringent ESG checks. A sound supply chain helps to avoid falling foul of, at best, adverse publicity and, worst, a liability claim for actions performed by their supply chain.
Supply chain due diligence is often considered as a ‘nice to have,’ but Germany recently introduced compulsory supply chain due diligence. The Corporate Due Diligence Obligations in Supply Chains Act came into effect on 1 January 2023 and requires German companies to consider and make sufficient checks regarding obligations in the ESG sphere (such as human rights or environmental-related rights) in their supply chains. The obligations extend to companies with branches in Germany and will impose significant duties on all such companies, to ensure all businesses within their supply chain meet stringent ESG standards and mitigate the risk of litigation for breaching the legislation.
Breach of the legislation could be costly, and sanctions for breach include substantial fines as well as preclusion from public contracts. Whilst Germany is, at present, the only country in the EU to pass such legislation, last year the European Commission proposed a new Directive on Corporate Sustainability Due Diligence. If the Directive is adopted, other EU countries may put in place similar laws. It is conceivable (if not inevitable) that the UK will follow suit.
It is not too great a leap to see such legislation being breached by virtue of ill-advised investment in companies which do not meet the obligations imposed on them under this Act.
And this is just the start.
Sustainable investments will support sustainable economic growth, which in turn feeds into the global goal of businesses and countries working collaboratively towards environmental sustainability.
Businesses that have a clear and transparent focus on the importance of ESG objectives will attract a higher level of investment, particularly from international investors, as the shift towards sustainability continues to gather momentum. Equally, investors who have a well thought through ESG objective are likely to be those who invest in companies which are authentically committed to ESG goals. It is therefore clear that corporates who embrace the importance of ESG factors, will be those who succeed.
It is not too great a leap to see such legislation being breached by virtue of ill-advised investment in companies which do not meet the obligations imposed on them under this Act.
And this is just the start.
Sustainable investments will support sustainable economic growth, which in turn feeds into the global goal of businesses and countries working collaboratively towards environmental sustainability.
Businesses that have a clear and transparent focus on the importance of ESG objectives will attract a higher level of investment, particularly from international investors, as the shift towards sustainability continues to gather momentum. Equally, investors who have a well thought through ESG objective are likely to be those who invest in companies which are authentically committed to ESG goals. It is therefore clear that corporates who embrace the importance of ESG factors, will be those who succeed.