ESG ( for Environmental, Social, and Governance) is now a critical component for infrastructure investment decisions in the energy industry. The traditional model compounded by a combination of profitability, reliability, and safety for investments in the industry now must include this new variable in the formula.
Why ESG became so crucial for the industry?
ESG involves looking into non-financial information and accounting not typically measured potential risks. These opportunity areas are associated with how companies deal with topics different from profits or financial measures in the operating environment.
According to the World Bank, around 36% of international institutional investors put this new approach as a first-order variable, even at the expense of performance.
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Also, infrastructure investors increasingly require ESG Impact reports from their managers. This situation is due to a more holistically-oriented vision towards stakeholders in investment decisions.
However, such an approach has its consequences and opposite perceptions. For instance, some investors fear the new perspective to “greenwash” every project without a robust financial analysis.
Furthermore, there exists the perception that ESG could constitute more on a marketing tool to attract capital than on an environmental-, social-, and governance-oriented approach.
In response, ESG advocates state that companies with robust practices in that regard can substantially identify, address, and successfully mitigate risks. Additionally, according to them, adopting environment-, social-, and governance-oriented practices lead to better corporate financial performance and higher levels of resilience in the long-run.
How about the energy industry?
For the last twenty years, a significant movement has been taking place within the sector. However, it wasn’t until the recent green movement that ESG became a substantial factor in society.
Funding to ESG projects currently accounts for a $40 trillion capital stack.
According to industry experts, the Environment aspect could be the easiest to target in the energy sector. This situation is due to current engineers’ capacities and abilities.
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Regarding the Social component, the industry needs more inclusion, diversity, better labor conditions, data security, and a more substantial impact in the community through social assistance and involvement.
Over Governance, what the sector can do to improve is to adopt business ethics. As experts perceive it, the new movement is crucial to achieving successful investments in the future; a scenario no one in the industry imagined some years ago.
Finally, and following other expert opinions, one crucial factor in ESG analyses is to commit to the three components of it at once, not just to privilege the “E” variable over the others.