Climate change. Sustainability. Changing consumer demands. It fills our social media and evening news. Alongside the headlines and diverse opinions, comes a stream of information embedded in terminology that may be unfamiliar.
ESG (which stands for environmental, social, and governance) is a term that’s been around for about 20 years. It originally started with a group of investors in Europe who recognised that ESG issues, when mismanaged, could evolve into significant financial issues for a company or industry. They believed that ESG factors should be assessed, just like investors do with traditional financial data and other possible influences and risks.
Sustainability investing seeks to take advantage of investible themes connected with the transition to a more sustainable society, for example clean energy or sustainable agriculture.
Responsible investment considers ESG issues while also committing to engage with companies to influence their direction of travel.
Impact investing goes a step further. It seeks to deliver measurable positive benefits to the environment or society alongside meeting a required financial return.
Companies and investors are greenwashing if they are giving the impression that their products are more environmentally friendly than they really are. Given the speed and scale with which money has moved into ESG products over the recent years, there is reason to be concerned. There are a number of indicators that can help you quickly identify whether you believe there is greenwashing at play.
First of all, sustainability claims should be backed up with targets, action plans, measurement and transparency reports.
Sustainability should be at the heart of a business strategy, not a bolt on after thought at the end of the report.
There should be strong governance and clear lines of accountability. And data, where possible, should be externally verified.
These sorts of indicators really help you assess and work out who is serious about this.
Net zero refers to a state in which the greenhouse gases (GHGs) going into the atmosphere are balanced by gases being removed. It is important because — for CO2 at least — this is the state at which global warming stops.
The Intergovernmental Panel on Climate Change (IPCC) has concluded the need for net zero CO2 by 2050 for temperatures to remain consistent within 1.5C. And most countries have agreed to work towards this as part of the Paris Agreement in 2015. However, to meet this goal, GHG emissions must halve over the next decade, falling 7% every year through 2030.
In 2020, this was achieved, but it took the first global pandemic in over 100 years to achieve it. This demonstrates just how considerable the required action is for every year out to 2030 and beyond.
In December 2022, Aotearoa New Zealand Climate Standards (the Standards) were finalised, in which large listed companies with a market capitalisation of more than $60 million, large licensed insurers, registered banks, credit unions, building societies and managers of investment schemes with more than $1 billion in assets; and some Crown financial institutions are expected to report on their governance, strategy and targets related to climate change from 2024, on their Financial Year 2023 activities. The ultimate aim of the Standards is to support the allocation of resources towards activities consistent with a transition to a low-emissions, climate-resilient future.
You can find more in-depth information on Aotearoa New Zealand Climate Standards » XRB
We hope you found this short article helpful and answered few questions you may have had. The Summer KiwiSaver scheme team realise you may wish to learn more on above topics so we look forward to building our ESG resources and supporting your investing journey.
Read more about socially responsible investment (SRI) in relation to Summer here.
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