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OPINION

ESG Principles Set The Scene For Sustainable Finance

ESG Principles Set The Scene For Sustainable Finance

Environmental, social and governance (ESG) investing has become of increasing interest to investment professionals globally. Investments that focus on ESG principles have gained more and more popularity among investors. Many mutual funds and brokerage firms now offer products that implement ESG criteria. For many investors, the adoption and implementation of ESG strategies is an important criterion for the selection of the investment firm. Further, ESG criteria help investors find companies with values that meet their own and gain a comprehensive understanding of the companies that they invest in. 

 

Fund managers focusing on ESG generally examine criteria within the environmental, social, and governance categories to analyze and select securities. Worldwide, the percentage of both retail and institutional investors that apply ESG principles to at least a quarter of their portfolios jumped from 48 percent in 2017 to 75 percent in 2019. Consequently, the investment firms and regulated companies implementing ESG strategies may have a positive impact on their value and performance. Firms with ESG policies aimed at minimizing their negative impact on the environment or companies that focus on governance principles and transparency. The objective is to reduce exposure to investments that pose greater ESG risks and consequently to influence firms to engage with more sustainable investments.

 

ESG criteria are a set of standards for a company’s operations that socially aware investors use to control potential investments. Environmental criteria focus on a company’s impact on the environment and considers the company’s energy use, waste, pollution, natural resource conservation and treatment of animals. Social criteria examine how a company manages relationships with employees, suppliers, customers, and the communities where it operates. The governance criteria focus on issues such as how the company is run, for instance, transparency and reporting, ethics, compliance, shareholder rights, and the composition and role of the board of directors.

 

The adoption of ESG policies by the firms contributes to the transformation of traditional investments to “sustainable’” or “socially responsible” investments. On a European level, certain criteria have been set in order for an economic activity to  qualify as environmentally sustainable investment. In particular, the new regulation issued by the European Commission, the Sustainable Finance Disclosures Regulation (EU) 2019/2088, which becomes applicable on 10 March 2021 provides more transparency on sustainability within the financial markets and is expected to affect a large proportion of the financial services industry in Cyprus. In line with the aforesaid, sustainable finance is one of the key considerations in Cyprus Securities and Exchange Commission’s (CySEC) policy making and strategic planning.

 

It is evident that an increasing number of investors give emphasis on the impact of ESG factors on their investments. Investments are entered into a new era since non-financial components are now affect the investment decisions of investors. The impact on the environment, the focus on governance principles and transparency are the new criteria to screen potential investments. Therefore, it is not surprising that the regulatory authorities including CySEC aim to help building the understanding of market participants on sustainable finance so as the investors to be able to specify their ESG preference and oblige the investment firms to take into account these preferences. Undoubtedly, new non-financial criteria shall now affect the decisions of investors, even those decisions made by "non-social conscious" investors.

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