There’s no going back for the ESG investing landscape

In recent years, the general sentiment across much of the investment sector has been one that pushes industries towards a greater embrace of environmental, social and governmental (ESG) minded products. 

While this has been a global movement, many see Australia as one of the leaders of this shift, given the variety of unique industrial and regulatory conditions that set it apart from many other nations. In order for both Australian businesses and the global market to keep up, they will need to embrace the fact that ESG investing is here to stay. Allocating the man hours and economic resources today, allows industries to lean into the investment landscape of tomorrow — enabling them to stay relevant and attractive to investors in 2021 and beyond.

The turn towards more globally minded investing isn’t merely conjecture or a simple fad. Plausibly spurred on by the health crisis and social justice movements of 2020, the total value of Assets Under Management in ESG exchange-traded funds ballooned from around $50 billion in the previous year to an astounding $150 billion. 

This shows that there is more going on here than mere sentiment, but an actual adaptation in how investors want to put their money to work and subsequently how businesses adapt to accommodate those desires.

This sudden jump in value locked into the ESG investment landscape has certainly caught the attention of industry professionals. In a recent interview with Reuters, investment firm Temasek’s head of impact investing, Benoit Valentin, said: “In five years from now, every single big private equity firm would have their own impact vehicle.”

While industries across the globe are waking up to how they can get in line with an ESG mindset, Australia has a few important characteristics that stand to put it as a leader in the coming years.

Take, for example, the steelmaking industry. Traditionally, steel making has used coal as a primary source for generating the heat necessary to turn iron ore into steel. But chairman of Fortescue Metals Group (ASX: FMG), Dr Andrew Forrest, feels that Australia needs to leverage its abundance of iron ore and innovate to use zero emissions hydrogen technology in place of coal. This would place the nation at the forefront of an emerging “green-steel” industry and undoubtedly bring in an abundance of ESG minded investors. 

In Forrest’s own words, “the green hydrogen market could generate revenues – at the very least – of $15 trillion by 2050, bigger than any industry we have.” In fact, Fortescue is planning on beginning construction of the aforementioned steel processing plant later this year, meaning that this isn’t merely ideology; it’s becoming a reality.

Another element helping Australia stand out on the global stage is the relatively comprehensive penalties, as well as incentives, that encourage businesses to take ESG compliance seriously. Within the current regulatory landscape, punitive consequences await company board members who cause damage through a failure to take environmental and climate risks into account. These include heavy fines and even potential jail time. This puts very practical repercussions in place for company heads, as opposed to more broad reaching corporate fines that rarely target leadership.

On the positive incentive side, there is the fact that the investment landscape in Australia weighs heavily towards long term investors. What this means is that these individuals are deeply concerned with how their portfolio will look 10 or 20 years from now, and as such cannot ignore the impacts of both practical climate change as well as how public opinion and evolving regulations will shape various industries. Broadly speaking, companies that don’t take this fact into account stand to not only lose their edge when it comes to desirability for investors, but also make themselves targets for regulators. This can bring harm to their shareholders and, of course, the long-term viability of the business. Clearly, no forward-thinking team of leaders would ignore these developments, but if they were to, it is likely they won’t be in a position of power for long.

Aligning existing industries with growing ESG demands is no small order. As Michael Robinson, director of Guerdon Associates in Australia, put it, “capital expenditure is typically larger to address systemic ESG issues that may not have a pay-off as quickly or as directly as other areas of focus.” Nevertheless, taking the appropriate action will ensure longer term success. Effort and resources expended in the immediate term represent a wise investment in the preferences of tomorrow.

The truth is, the landscape for modern investments simply doesn’t look like it did a couple of decades ago. Just because a financial product has potential for high-performing returns doesn’t automatically make it attractive to investors who take environmental impact into their calculations. Fortunately — at least in the realm of precious metals — options are opening up that satisfy these new appetites.

Trovio, for example, operates a blockchain-powered platform for the digitisation of gold and other precious metals, giving their clients access to previously unattainable markets and taking out the middleman in commodity transactions. The company is set to launch the world’s first carbon neutral gold ETF, known as GoldZero, on the Australian Securities Exchange.

GoldZero has been jointly developed with Xpansiv CBL Markets (CBL), the world's largest voluntary carbon credit exchange. The carbon neutral ETF will leverage Trovio’s proprietary technology to immutably link digital certificates for physical gold with CBL’s commoditised carbon offset contracts — creating a market leading solution to ESG compliant gold. Trovio and CBL intend to continue the expansion of carbon neutral assets in the near future.

Ultimately, it is looking like the whole world is gearing up to make ESG investing a focus of the 21st century. Both technological and regulatory developments are pushing industries to rethink how they operate and police themselves. Fortunately, Australia is in a fantastic position both industrially and culturally to step up and ride this new wave, hopefully placing it as a leader in the new, ever evolving, investment landscape. With products being created like GoldZero, investors worldwide stand to be able to change the way they use their money and make wiser, more ESG-focused investment decisions moving into the next decade.

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