ESG-compliance seen costly near term, but paying dividends further out

New York — The market needs to be a little more realistic about environmental, social and governance matters, and accept that balance-sheets could take a hit near term, yet yield potential dividends further down the line, market participants and analysts say.

As the world navigates out of the coronavirus pandemic and the associated humanitarian and fiscal fall-out, markets are waking up to the fact that investors are becoming increasingly ESG-savvy in approach.

Big name funds are auditing their portfolios, and the less compliant a company is the more likely it is to be vetoed until it cleans up its act.

The cold hard truth of the matter is that the added levels of audit and compliance come with an increasingly weighty cost at least in the short term.

"We need to not approach this with such rose-tinted glasses, and instead with a healthy dose of realism. Near term there is the potential for some negative financial impact as companies adjust to a sustainable investment future. But, long term that will be paid in dividends for those that get ahead of the ESG-curve Britishvolt founder and CEO Orral Nadjari said. Britishvolt is aiming to build the UK's first battery gigafactory, with first run scheduled for 2023.

He pointed out that major funds and institutions were becoming increasingly hot on their investments complying with ESG-metrics, and that this will undoubtedly shape the future landscape of money raising requirements

One senior investor told S&P Global Platts: "Net zero is a buzzword in the financial markets and anything with an ESG-angle is aggressively marketed. This happens almost regardless of whether the company really has any meaningful solutions to the net-zero transition."

The need for renewable energy and low-carbon production methods -- including local supply chains -- are being thrust to the top of investors' agendas.

During the Bank of Montreal's LME Week seminar back in Oct., managing director of commodities research Colin Hamilton said ESG was no longer a "fad" as there was growing investor interest.

These days "you have to know about ESG...[it will be] core front and center of the industry" going forward, he said.

ESG overload, but still needed

The senior investor added that there was a bit of ESG overload at present. "Tt's almost getting too much, but at the same time investors require it and this will not change any time soon. So in my view I think a company needs to be different to gain attention."

Costa Caldis, COO of SAFE Supply, a supply chain traceability company, told S&P Global Platts: "As the world moves towards sustainability there is no denying the fact that investors are increasingly crying out for ESG-linked vehicles to park their money. The increased requirements will incur costs for companies in terms of increased reporting and auditing. Yes, that's a challenge and adds complexity near-term, but also presents companies with a huge opportunity to generate a competitive edge that hits the bottom line."

Pala Investments Vice-President Jessica Fung said that, theoretically, local supply chains are a nice idea, but cautioned on how they are developed economically, noting that government subsidies and a return on investment are both required for success.

Ernie Ortiz, investment analyst at Tide Point Capital Management, agreed with Fung that local supply chains would be a struggle to bring online any time soon.

Talking to S&P Global Platts Dec. 8 Geordie Wilkes, head of research at Sucden Financial said, "in terms of becoming more ESG compliant, we believe the cost curve is likely to increase. However, the argument that becoming more environmentally friendly means lower returns is flawed, in my opinion. If done correctly there is substantial upside. Indeed, a company could incur significant costs in the long run from not factoring in ESG."

Managing Director and global head of ESG research & data at S&P Global Manjit Jus said earlier in 2020 that he had seen improvements in terms of the information available on environmental-related topics for investors.

There are still areas that were under-reported such as corporate supply chains where improvements could be made, but there had been tremendous progress over the past decade, Jus said.