The Mainstreaming of ESG: Opportunities Ahead In A Green New World
“A true conservationist is a man who knows that the world is not given by his fathers but borrowed from his children.”
Quote from John James Audobon, 1841
From its origins in the 1960s via books, like Rachel Carson’s Silent Spring published in 1962, or through movements, like Pete Seeger’s the Hudson River Clearwater Sloop Inc. founded in 1966, and through incidents such as the Houston Ship Channel catching fire in November, 1959, leading to the fire on and explosion of the tanker Amoco Virginia, which was loading product at a dock on the ship channel, the Environmental movement grew rapidly from a fringe movement to mainstream. It led the U.S. Congress to enact the National Environmental Policy Act of 1969, President Richard Nixon to establish the Environmental Protection Agency in 1970, and the U.S. Congress to pass further environmental legislation including the Clean Water Act of 1972. Each one of these actions set new precedents for the importance of environmental considerations across all aspects of the United States, whether business, government, or social. Now, 50+ years later, these environmental considerations intertwine across the fabric of the country and have been combined with Social and Governance aspects to form a new movement transforming business and society once more in the United States and across the globe.
To provide perspective on the impact of these forces on a global basis today, one need only observe the amount of capital that now falls under the rubric of Environmental, Social, and Governance (ESG) Assets. While only ~$800 billion in financial assets directly fall under an active ESG mandate, over $31 trillion in assets include some form of ESG integration or factors in their management. With ~$74 trillion in assets managed by the top 400 asset managers globally, this represents over 40% of assets managed globally by these entities. Such penetration exerts tremendous pressure on corporations and their managements as these factors come to provide significant inputs into how the valuation of both public stocks and private companies are computed. On the negative side, of course, sit liabilities such as clean-ups, scrubbers, filtration equipment, retooling of existing processes, … However, on the positive side sit opportunities to address numerous issues identified such as carbon emissions, water stress, packaging material, … that can create significant wealth for companies that bring innovative solutions to these issues.
Environmental solutions sit at the heart of this movement and cut across a broad diversity of approaches and technologies. Numerous technologies have now hit critical thresholds on a price-performance basis, leading to these products scaling the traditional adoption curve. For example, Electric Vehicles (EVs) and Solar Power now possess mass market adoption. As these products continue to come down the cost curve, due to technology improvements and manufacturing scale up, they will continue to gain share on a global basis over the next decade. In addition to these existing technologies, new technologies await regulatory approval and/or capital to see broad deployment in the U.S. and Europe. For example, DSM N.V. developed a new enzyme to add to cow feed that reduces cow emissions of methane by 40% without impacting production of milk. It sits before European regulators awaiting approval. Or, for example, Pure Cycle Technologies licensed Procter & Gamble recycling technology. It developed the technology into a commercial technology, with a $300 million plant now under construction in Ohio. This technology recycles plastic packaging from household products into good-as-new plastic at a fraction of the cost of today’s recycling technologies, making it competitive with plastic produced from raw materials. This novel, recycling technology will help municipalities looking to dispose of local trash in the U.S. as well as aid companies in meeting strict new cradle to grave recycling regulations in Europe. Other obvious opportunities will occur in infrastructure for charging EVs, storage for Solar Power, new lighter weight materials to meet vehicle mileage requirements, …
On the Social side of the equation, numerous opportunities sit areas such as Human Capital and Social Opportunities. These areas include education, training, safety, privacy and data security, and access to finance among their sub-components. In numerous areas in the United States, there exist opportunities to provide education and training to company employees and to train new workers or existing workers looking to gain new skills. Privacy and data security exploded as an issue over the past 5 years, providing huge opportunities for technology and consulting companies to create novel ways of addressing these issues or to enable existing companies to meet new regulations. In finance, numerous entities now focus on providing access to capital to groups that hitherto could not access capital whether through crowd funding vehicles, capital raising entities, or through charitable organizations providing below market loans or hitherto non-existent loans. New safety regulations created opportunities in many mundane areas. For example, regulations forced industry to move away from silicon abrasives to grind and polish surfaces to eliminate toxic chemicals in the air produced by these materials, enabling new companies to enter the industry.
Lastly, Governance issues continue to impact corporations. Poor Corporate Governance now exposes companies to shareholder pressure as well as lawsuits and liability. For example, composition of public boards now faces heightened scrutiny. Companies that do not demonstrate appropriate attention find themselves the subject of unwanted attention. In addition, if these boards do not implement appropriate risk controls, board members can now find themselves personally liable for risks that could not be imagined a decade ago. And, for example, regulators are now all over governance policies around data security and data privacy. Both the Federal government and States continue to put pressure on companies to create Governance policies around these areas. These pressures only seem likely to rise over time and to expand to private companies as well.
With the Mainstreaming of ESG, no investment will stand unscathed. Those companies that do not meet these standards will find themselves at a disadvantage in the competition for capital in the future. While those that do, may find cheap capital available. Furthermore, those companies that do not embrace ESG may find their products and services become obsolete as newer products embracing ESG proliferate to a generation more in tune with these values. For companies that can meet these demands, there stand Significant Opportunities Ahead. And for investors, it appears the world of investing will become a Green New World. (Data from public companies and IPE coupled with Green Drake Advisors analysis.)
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