The concepts covered by the acronym ESG (Environment, Sustainability and Governance) have become the key criteria of investors around the world when deciding which companies to trust. This is one of the main findings of the online meeting “Boards of directors and social and environmental challenges”, held last week by the Corporate Governance Centre at Esade run by Mario Lara. Participants included Gema Garrido, director of ESG Investments and Non-Financial Report at Telefónica, and Carlos Sáez Gallego, managing director of Georgeson. During their talk, they also agreed that their biggest challenge is the search for the best way to measure the social impact of this type of investment in order to remain attractive to shareholders despite the COVID-19 crisis.

Case study. Telefónica’s green bonds

“For Telefónica, sustainable or ESG investment accounts for more than one third of the assets under management”, said Gema Garrido, who did not hesitate to emphasise that “98% of their investors are particularly sensitive to policies of this sort”. To be precise, the assets proposed by the company focus on three factors: “society’s shift towards greater concern about climate, security and privacy; the shift of stock exchanges towards ESG investment criteria too; and paying more attention to all of the company’s stakeholders, not just shareholders”.

In this respect, the director of ESG Investments and Non-Financial Report at Telefónica emphasised that hers was the first telecom company to issue green bonds, with two issuances to date: one in 2019 worth one thousand million euros and another in 2020 worth another 500 million. “Our aim,” explained Garrido, “is to fund the rollout of fibre in Spain and reduce the use of copper and close down 990 exchanges using copper. This will make our connections 85% more energy efficient”. “These bonds have made us different and helped us diversify our debt into other sorts of instruments with the same characteristics as any other financial product and which have also been validated by a rating agency,” she stressed.                              

Measurement. The biggest challenge of sustainable investment

“At present, our biggest challenge is sending out the right message about the impact of ESG on returns and making contact with the right investors,” emphasised Gema Garrido. She then pointed out that although many studies show that investors acknowledge the direct relationship between financial returns and sustainability, “only a minority say that their companies have drawn up a business case that takes into account.”

At Georgeson, managing director Carlos Sáez Gallego underlined in this respect that “increasing numbers of empirical studies show that ESG has a direct impact on corporate performance.” One of them is his 'Responsible Investment Observatory', which also recorded an exponential growth in responsible investment around the globe, particularly in companies whose lines of action include pandemic forecasting, work to overcome climate change, and concern about cybersecurity, diversity and alignment. “The securities managed with socially responsible criteria account for a total of 30.7 billion dollars, an increase of 34% over the previous period,” he said.

Investment in pandemic times

In addition to the growing interest in ESG, Mario Lara, director of Esade Madrid and head of the Esade Corporate Governance Centre, attributed the increase in sustainable investment to two basic facts, “the letter that Larry Fink, the CEO of Blackrock, sent last year to the presidents of the world’s leading companies warning them that his fund would cease to invest in companies with high risks related to sustainability and climate change,” and the declaration made by the Business Roundtable, which represents the main listed companies in the US, urging them to take not only shareholders but all of society into account.

In this respect, Lara added that “the COVID-19 crisis will be an acid test for companies to show that the ESG commitment they undertook last year is still alive today.” “So far, ESG investment has fallen very little, much less than other assets and debt issuances, and everything suggests that once this crisis is over, it will be far more important,” he concluded.