Environmental, Social, and Governance (ESG) investing is one of the freshest concepts in business.
Yet, according to the American news agency Morningstar, the investment flow in this fund is increasing — it doubled in the United States between 2019 and 2020. Also, COVID-19 has strengthened ESG so that it is now the driving force behind M&A.
What is ESG investing?
ESG investing is a type of investment in which decision-making on projects depends on three aspects.
- Environmental criterion. Here, the focus is on a company’s attitude to natural resources, pollution, and waste. This standard evaluates the likelihood of risks and the ability to manage them.
- Social criterion. It is the monitoring of relations within a team, volunteering, and donations to a local community. The issue of working conditions is also under scrutiny.
- Governance criterion. A company must shed light on shareholder voting rights and accounting methods. Investors make sure there are no illegal acts, political contributions, nor the influence of personal interests when appointing the board of directors.
To sum up, these aspects are the basis to find organizations that pay due attention to:
- environmental protection
- management ethics
- social responsibility
“A company’s ability to manage environmental, social and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth.”
CEO of the international investment firm BlackRock
What are the main trends of ESG?
ESG investing is becoming commonplace. The proof is not only in US statistics but also in European data. Here, the indicator grew 77% last year compared to 2019. Knowledge of trends helps to meet investor expectations and prove strategic resilience.
Now, there is a necessity to disclose large volumes of data on corporate, environmental, and social topics. In the future, companies will have to make more of an effort for high-quality and transparent reporting. Moreover, it is necessary to comply with the GRI or SASB standards.
Facing COVID-19 has proven to be a tough challenge and has forced thousands of office employees to work from home. Because the vaccination process is well under way, organizational operations will eventually return to normal.To meet ESG standards, directors should be open to requests for flexible hours, work-from-home opportunities, etc.
Directors have to develop an action plan to deal with these problems. Regardless of the industry, companies will have to provide psychological support to those in need upon returning to their offices. The same applies to the management flexibility in cases of COVID-19 and the availability of vaccines. Many employers offer health insurance which helps to make companies more sustainable.
High demand for technology
Modern technologies not only automate work but also cooperate with investors. Various informational extraction methods and artificial intelligence will organize data collection and disclosure.
The influence of data rooms on ESG
ESG investment is not risk-free. Hence, the approach to the deal is critical.
- Financial risk. One of the cases is non-compliance with anti-corruption laws. As a result, a team risks failing with big contracts and paying hefty fines.
- Legal risk. The reason is the lack of ESG due diligence. Failure to detect criminal actions is fraught with the fact that they will continue in the future.
- Reputational risk. Buying or investing in an organization with a history of human rights violations or negative environmental impacts damages an investor’s reputation.
When looking at the transactional process itself, leaks and confidentiality breaches can slow it down significantly.
Advanced virtual data room technology helps prevent most of the problems. Below are the results from a survey of over 2,000 experts in mergers and acquisitions.
- 35% of ESG companies said the online platform speeds up due diligence. That is possible through built-in artificial intelligence.
- 78% of respondents fear data corruption, which jeopardizes the entire deal. Today, VDR software protects through encryption and compliance with GDPR and other regulations.
- 36% consider cybersecurity to be the most pressing issue on the road to a successful deal.
- 69% predict the importance of ESG factors to be high by 2025. They also emphasize increased attention to privacy practices over the next few years.