TRENDS AND CHALLENGES OF RESPONSIBLE INVESTMENT & ESG Paul Venturino, executive director Strategika -a GHMC partner- Sebastián Goldsack, PhD, professor at the Faculty of Communications of Universidad de los Andes, Chile. Although the concept of responsible investment has been used for approximately 60 years, only recently have standards been established. The climate crisis has accelerated the need for implementing new strategies to address rapid global and technological changes. We refer to these new standards as ESG (Environment, Social and Governance) principles. There were two key milestones in the ESG evolution. The first was the creation of the Dow Jones Sustainability Index in 1999, a stock index focused on sustainable investments which allowed for broader financing options. The second, much more recent, was the UN Global Compact of the Principles for Responsible Investment (UNPRI, 2023). One of the key elements of responsible investment is active incorporation of ESG criteria. This implies everyone in the chain (organization, shareholders, financiers, management) must adhere to rules and be proactive agents of mobilization. ESG criteria is based on three pillars: Environment : Refers to the environmental impact of an organization and the activities to reduce it, especially in areas such as emissions, waste or use of natural resources. Social : Refers to the management of people in the workplace and the community in various aspects such as human rights, gender, inclusion. Governance : The way in which corporations or institutions are organized. The key is respect for rules and transparency. As with any regulatory change, responsible investment has also been strongly pressured by changes in production conditions, stricter regulations and strong activism. ESG criteria seeks to respond to scenarios with measures that allow us to face challenges while maintaining profitability (Shakil, 2021). With this in mind, we interviewed key executives from Chilean and multinational corporations operating in Chile to learn the latest trends and challenges in responsible investment and ESG. Key trends: Investors—especially investors in international companies—are driving the movement for responsible investment by pressuring these organizations to incorporate ESG criteria. ESG criteria are beginning to include the full value chain, transferring good practices to all steps of a company’s operation. Although incipient in Chile, there is pressure to achieve higher diversity on boards (gender, class, race/ethnicity, professional backgrounds). There is a movement toward clear and effective tools to guide compliance and measure accountability. Regulations can help ensure higher ethical standards across industries. A diverse, inclusive workforce with a safe workplace environment is positive for workers and business alike. Companies are now more motivated to seek new ways of doing business and transforming their forms of production, in order to maintain profitability. Climate change mitigation is seen as a strategic pillar of a company’s ways of doing business. The traditional way companies engage with interest groups (advocacy groups, etc.) is evolving to include new ways of working. In addition to these positive trends, come challenges. The biggest challenges relate to the speed of adoption of these practices, and whether they can generate profitability. Challenges to be addressed in the short term A move from tactical actions and rankings to a genuine modification of the ways of doing business and the governance structure at a high level. Convince executive boards of the importance of ESG trends and responsible investment criteria. Strengthen the ethics of executives. Raise standards in industries and ensure all companies adopt ESG. Improve the legislation applied and the bureaucracy of the authorities. EXECUTIVES INTERVIEWED FOR THIS INVESTIGATION Kelly, Conrod, Managing Director MSD Chile Margozzini, José, Gerente general TEG Chile Orrego, Carolina, gerente de asuntos corporativos y cumplimiento Empresas Melón Pinto, Patricio, gerente de asuntos corporativos Minera Los Pelambres Vergara, Ana Luisa, subgerenta de sostenibilidad corporativa Colbún Vilches, Javier, gerente general Grupo Eulen Chile Wood, Alejandra, directora Codelco BIBLIOGRAPHY Avramov, Doron: “Sustainable investing with ESG rating uncertainty. Journal of Financial Economics., volume 145, issue 2, pages 642-664. Available in https://www.sciencedirect.com/science/article/abs/pii/S0304405X21003974 Capital research Center: ESG Activism, en Influence Watch, 2023. Available in https://www.influencewatch.org/hub/esg-activism/#:~:text=ESG%20activism%20refers%20to%20individuals,part%20of%20evaluating%20business%20operations. Cloyd, Mary Ann: Shareholder activism. Who, What, When and How? Harvard Law School Forum o Corporate Governance. Available in https://corpgov.law.harvard.edu/2015/04/07/shareholder-activism-who-what-when-and-how/ Edmans, Alex, The End of ESG (January 4, 2023). Financial Management, forthcoming, available in SSRN: https://ssrn.com/abstract=4221990 o http://dx.doi.org/10.2139/ssrn.4221990 García Beatriz y Grande Cristina: Nuevas formas de gobierno empresarial? Activismo e influencia de terceras partes interesadas en información económica-financiera. Boletín de estudios económicos Volumen LXXVII n°233, diciembre de 2022. Deusto. Available in: https://bee.revistas.deusto.es/article/view/2561/3286 Shakil, Mohammad Hassan: “environmental, social and governance performance and financial risk: moderating role of ESG controversies and board gender diversity. Resources Policy, Volume 72, August 2021. Available in: https://www.sciencedirect.com/science/article/abs/pii/S0301420721001586?via%3Dihub Unpri: Principios para la inversión responsable, available in https://www.unpri.org/download?ac=10970
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