Need funding in the near future? Maybe get your ESG ducks in a row

Sustainable finance is a novel concept. But what exactly is it? According to Jersey Finance, an International Finance Centre (IFC) based on the Jersey Island (and has adopted a strong ESG approach), it is when investments are made keeping in mind the beneficiary’s impact on the society around them.

This week, Jersey Finance touched down on SA soil to educate the masses on the changes in investment strategy both in South Africa and on a global front in terms of the Environmental, Social and Governance (ESG) criteria.

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Jersey Finance, which is run as a not-for-profit organisation, was formed in 2001 to represent and promote Jersey as an international financial centre (IFC). It is funded by members of the local finance industry and the Government of Jersey. It is an IFC with a presence in Jersey, Dubai, Hong Kong, Johannesburg, London, New York, Shanghai and Singapore.

A self-governing island that can enable facilitation of cross-border investment

Jersey is an Island just off the coast of France. It is a self-governing Crown Dependency of Great Britain and is not part of the United Kingdom or European Union. The island has jurisdiction which carries out substantial non domestic banking, investment or corporate activity and as such thereby enables the efficient facilitation of cross border investment. Jersey Finance is one of the channels that brings in foreign investment into South Africa, acting as a bridge between capital raising in Europe and investment in Africa.

As such, the experts held panel discussions to speak about how ESG was becoming more factored into risk analysis and how investors were taking into account the considerations that certain start-ups made around environmental, social and governance factors.

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But why is ESG so important?

Because issues like climate change, gender inequality, racism, nepotism, and bribery and corruption are real and are resulting in more than just the decay of society – they are resulting in massive financial losses.

Examples of this would include the damage caused in KwaZulu Natal earlier this year by the uncharacteristic floods that destroyed billions of rands worth of infrastructure. This was as a result of climate change – an environmental factor.

Media reports that Nike was paying its male employees a lot more than it was its female employees, severally tarnished the brand, resulting in a decline in support and sales – a social factor.

Twitter purposefully withholding its strategy outlining the company’s way forward after it was bought by Elon Musk, saw the exodus of a number of employees, resulting in down-time a rehiring process and ultimately more unnecessary financial expenditure – a governance factor.

Conscious change

Jersey Finance’s Allan Wood explained that a conscious change needs to be made in order to limit the amount of losses that has been experienced as a result of these situations. “Investors are consciously looking to reduce harm from investments,” he explained, “ They are aware of potential negative impact and are trying to mitigate it.”

The example was given of a small company specialising in transportation using vehicles with high carbon emissions. With an investment, that company will likely grow adding more vehicles to its fleet, and would therefore increase the carbon emissions into the environment. This will likely increase the strain of global warming, and affect the impact on climate change. The investor is therefore seen as merely accelerating environmental issues, with the eventuality resulting in financial losses.  

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It is for this reason that investors were looking at how conscious an entity was of the ESG factors around them, how they were managing them and whether the management of those factors were enough to limit the incidences of financial loss as a result of a mishap.

Greenwashing, pinkwashing, whitewashing

But these efforts in ESG policy-making and implementation need to be sincere. Speaker on the panel, Jo McDonnell – from Impact Lead, Invest Advisory – explained that there were one or two of those entities who were desperately seeking funding and were therefore making claims about being ESG credible when they were not, resulting in what was now being termed greenwashing (pretending to be environmentally concerned), pinkwashing (faking inclusion, gender equality and diversity) and whitewashing (an attempt to stop people finding out the true facts about a situation).

“You really need to be credible about the claims you are making. The way you can do this is to ensure you have a clear impact strategy in place at the beginning; being clear about what impact is being considered at the decision-making stage, and then integrate impact and ESG into your IC memos, and your board meetings, etc, but most importantly to protect against greenwashing – on an environmental front – or even pinkwashing, on the diversity or inclusion front,” she said. She further advised that it was not enough to just have a policy – they needed to be implemented as well.

But what is the criteria used by which to measure ESG ratings?

At present, there is no hard and fast criteria set or checkbox by which a company can check itself against. In fact, ESG ratings are not yet standardised.

But RMB bank, however, does provide a service by which it proposes ESG platforms to offer its clients insights into risk categories that are critical to what they have considered an ESG-aware investment journey. The bank offers an assessment of a company’s controversy association, carbon risk and product screening.

According to a Stanford University study, ESG ratings are affecting companies adversely as they result in unfair biases brought about by sometimes inadequate standardizations and incomplete and inconsistent data. But this is not deterring Jersey Finance investors from insisting on ESG compliance. Jersey’s 2030 vision is to be recognised by its clients, key stakeholders and other partners as the leading sustainable international financial centre in the markets it serves.