ESG investment seeks profit and way out of identity crisis

The green fever in business cooled down in 2022 with the global inflation crisis taking away the enthusiasm for ESG investments, the acronym in English that the corporate world uses to talk about responsible business practices with environmental, social and governance issues.

Moving away from the fad and rejecting the idea that ESG is a bubble, professionals and companies with a leading role in the Brazilian financial market take advantage of this moment to deepen the debate on what is, in fact, a profitable investment aligned with healthy business practices. for the planet and its inhabitants.

In the investment fund industry, this discussion has resulted in a recent classification of financial products that claim to be green. The initial numbers of this work, as well as the lack of consensus on this labeling, show that much remains to be done.

Of the 27,893 funds available in the country, only 23 received seals of sustainability or that at least integrate ESG principles from Anbima (Brazilian Association of Financial and Capital Markets Entities). Another 40 are under analysis by the entity.

It is a voluntary regulation of the sector, without government interference. An attempt to contain the exaggerated use of terms linked to sustainability, whose proliferation could discredit initiatives effectively committed to the theme, according to Carlos Takahashi, one of the vice presidents of Anbima and president of BlackRock in Brazil.

After the first wave, demand for ESG investments “is small and in a limited sphere,” says Takahashi. “We’re still in a phase where people are learning and getting informed. It’s a much broader discussion than focusing on specific issues”, she comments.

Finding a widely accepted definition of what an ESG investment is, however, is a challenge for professional and amateur investors, according to Victor Montezuma, head of analysis at Suno Research. “What is ESG for some is not for others,” he says.

Fabio Alperowitch, an ESG specialist and partner at Fama Investimentos, says that none of the funds classified by Anbima as sustainable has this quality.

“No investment fund in Brazil should be classified as sustainable,” says Alperowitch. “Neither mine,” he says.

He argues that there are not enough companies on the Brazilian Stock Exchange that can be described as sustainable for the composition of a stock fund with this characteristic.

Here it is necessary to explain that there is a difference between ESG and sustainable.

Anbima’s classification adopts a European model that points out as sustainable only investments from self-sustainable activities. The production of energy from clean sources such as solar and wind is an often cited example.

Sustainable investment may have the suffix “IS” in the name.

Investments that are not sustainable, but that integrate aspects of the social, environmental and corporate governance agenda, can be presented as ESG.

Of the 23 funds classified by Anbima, 18 carry the sustainability seal. Another 5 are on the ESG list.

Anbima says that funds classified as IS or ESG are continually evaluated and that failure to comply with the rules may result in the product being disqualified.

Finding out whether an asset is sustainable or aligned with the ESG agenda is part of the work of Lincoln Camarini, head of research and risk at Resultant, a consultancy specializing in environmental, social and corporate governance analysis for investments.

But how do you know if an asset is truly ESG? “That’s the answer worth a million dollars,” jokes Camarini. He didn’t charge anything to explain that companies that practice greenwashing (the green makeup to deceive the public opinion) usually give hints of this.

The tip is to look for the description of activities reported as ESG on IR websites (Investor Relations) and in other spaces that companies that have shares and other assets in the market use to describe their practices. The objective is to ascertain the depth of the speech.

“When the company does not have robust practices, the speech is shallow”, says Camarini. “It is shallow for the company to say that it has actions aimed at responsible water consumption. It is robust to show that water scarcity is a concern for the operation, that industrial plants in regions of water stress monitor water consumption, that there are targets for reduce consumption.”

“A shallow speech says that there is an initiative, but it doesn’t say which one. A robust speech brings indicators, goals and strategy”, he says.

Does ESG Investment Make a Profit? Understand why the market says yes

The multi-billion dollar investment firm BlackRock is one of the main responsible for the propagation of the ESG concept in recent years.

In 2019 and 2020, the manager’s global executive director, Larry Fink, mentioned in his letters to the market that climate change and sustainability will be a priority for the future owners of the money.

Fink translated the question into the language of the market, that is, in figures. He explained that the world is experiencing the biggest generational transfer of wealth in history, with an estimated $24 trillion (£130 trillion) passing from baby boomers to millennials.

The topic gained traction with the pandemic. Perhaps because Covid-19 materialized the impact of the environmental imbalance on the economy, or possibly because there was a lot of money on the market.

Investors embraced ESG at a time when cheap credit was plentiful. Central banks slashed interest rates around the world to avoid freezing economic activity due to restrictions imposed by the virus.

A very different situation occurs in 2022, with interest rates rising aggressively to contain inflation.

It is a mistake, however, to ignore that sustainable investments can be profitable even in crisis scenarios, according to Alperowitch, from Fama Investimentos.

“We need to free ourselves from the fallacious dichotomy between being responsible and making money,” he says. “Responsible companies make more money.”

“If the company has the least ESG vision, it tends to gain market share through consumer loyalty, reduce employee turnover and receive fewer environmental fines”, says Alperowitch.

“Taking a completely cynical and materialistic approach, people should still invest in companies that are on the ESG agenda.”