By Swajit Rath
Global interest in the environment, social, and governance (ESG) investments has grown rapidly over the last few years. According to Bernstein analysts, sustainable investment in key markets, including the US, Australasia, and Europe, reached US$35.7 trillion in 2020. It comprises more than one-third of all assets under management.
While Europe has always been the leader in ESG investing, we see the trend gaining significant momentum in the Asia Pacific. According to an MSCI survey, nearly three in five investors from this region plan to make ESG a part of their analysis and decision-making processes by the end of 2021.
Covid-19 a turning point for ESG investing
While there are plenty of pressing issues confronting our generation, the pandemic is one of the top challenges of recent times. The tremendous impact that Covid-19 had on the global economy highlighted how unforeseen events could impact investment returns.
Consequently, many investors recognise the need to change how they analyse companies and investments. Close to 80 per cent of investors in Asia-Pacific increased their ESG investment in response to Covid-19. We believe this is a prudent move as a study has indicated that companies with high ESG scoring had lower volatility for their returns and produced more consistent financial performance.
ESG-related issues, such as climate change-induced natural disasters and worker unrest, can severely impact a company’s operations and profitability. Companies that actively address these risks through robust ESG policies can partly mitigate the adverse outcomes and produce more reliable financial results. That translates to lower downside risk for investors.
Companies that create value for their stakeholders and positively impact the wider society and the planet can foster greater trust and bolster their resiliency. We feel that the move is true, especially as the economy remains volatile while social conscience grows among people, putting companies in a stronger position for recovery and growth.
By analysing and rating companies based on their financial and ESG metrics, investors can better account for unanticipated risks stemming from societal and environmental challenges. This gives investors a good indication of a company’s current and future performance. Moreover, ESG investing allows socially conscious investors to screen and select investments that better fit their values and financial goals.
Rising ESG interest a boon for SMEs
As investors’ interest in ESG continues to grow, it will lead to the emergence of more ESG financing programmes. Today, many ESG financing initiatives are still designed for larger companies. A key reason is that these companies have access to the resources, data and expertise needed to measure and report their ESG impact, an important criterion for these types of financing programmes.
On the other hand, the SME community remains a sizable untapped segment for ESG financing, and we are expecting more SME-tailored programmes to surface. However, these initiatives will need to consider SMEs’ constraints and evolve how they assess and qualify responsible, sustainable SMEs.
For example, Asia’s first ESG-focused structured finance programme for SMEs – the S$60m Incomlend ESG Invoice Financing Programme – will assess SMEs’ ESG plans using established international standards, such as the United Nations (UN) Principles on Business and Human Rights and the UN Sustainable Development Goals. This alternative financing initiative will provide SMEs that meet the ESG criteria with quick turnaround invoice financing solutions.
This is an advantageous development for SMEs, especially those that continue to go unfinanced. By becoming more ESG-focused on their business model and operations, SMEs can have more avenues to secure working capital, allowing them to diversify their funding.
Furthermore, these ESG financing solutions can improve SMEs’ cash flow, giving them the fiscal agility to pursue new revenue opportunities or make bolder ESG-centric changes within their organisation and supply chain.
ESG financing critical for a sustainable future
Many SMEs today still view ESG and profitability as conflicting goals. More ESG-financing programmes for SMEs can encourage more companies to adopt responsible business practices with tangible financial incentives.
At the same time, we support SMEs that are already focusing on ESG to grow their revenue. By empowering these ESG-centric SMEs to expand their business and increase their profitability, they can become successful role models that their peers emulate. It will help more SMEs realise that ESG is not a hindrance but a growth accelerator.
SMEs represent approximately 90 per cent of businesses and employ more than 54 per cent of the workforce globally. Their contributions and impact on the global economy and our society are tremendous. With ESG investing and financing for SMEs, we are taking a step in the right direction by spurring more companies in the SME community to adopt responsible and sustainable practices. Collectively, they have immense potential to make a meaningful, positive difference to our future.
The writer is CEO of Incomlend Capital