Relationship between ESG issues and investment
In the investment field, environmental, social, and corporate governance (ESG) criteria are non-financial or extra-financial factors that indirectly affect companies as they impact the performance of investors’ portfolios and companies’ finances. They are the three main criteria by which corporate sustainability and the potential linked to a company’s financial performance are assessed.
Several studies have confirmed that companies that include ESG issues in their organizational policies have better performance than companies that do not. In 2011, research conducted by Harvard University showed the correlation between the incorporation of ESG issues in organizations and their higher performance in the stock market (Eccles & Serafeim, 2011). Likewise, it has been found that 80% of the market price performance of companies is positively influenced by good practices in sustainability; it confirms that considering various ESG criteria in investment decision-making results in higher profitability (Morgan Stanley, 2018).
Insurance companies play a very important role in institutional investment in Colombia since, as part of their risk management activity, they consolidate funds that are budgeted to pay in the case covered risks materialize. These reserved funds, once consolidated, are invested in various economic instruments, complying with rules linked to the nature of the risk taken through the policies from which the funds come. This investment activity gives insurers the ability to influence the sustainable market, they are a vehicle to enhance the implementation of best practices of the companies they invest in (Jiménez & Angel, 2019).
ESG risks classification in Colombia
The Financial Superintendence of Colombia (SFC) is developing a taxonomy (classification) based on international experiences and local priorities, which allows orderly and sustainable development of the market. It is intended to identify investment opportunities that meet high sustainability standards.
Consequently, in 2019, 2020, and 2021 the SFC surveyed the entities under its supervision, in order to know their perception of financial risks related to climate change. The 2019 survey showed that 63% of general insurance companies, 53% of life insurance companies, 66% of pension fund management companies, and 60% of trust companies have not considered environmental issues in the framework of their functions.
For this reason, the Colombian Insurers Association (Fasecolda) has been promoting a policy to include ESG factors in insurance products and advice to clients in order to reduce this gap.
At the international level, the European Union has also been working on a taxonomy of sustainable activities in order to create a common language for all institutional parties in the financial system. This taxonomy seeks to support investors and companies in making environmentally friendly investment decisions. It is a list of economic activities and key performance criteria aimed primarily at achieving six objectives (TEG, 2020):
- Climate change mitigation
- Climate change adaptation
- The sustainable use and protection of water and marine resources
- The transition to a circular economy
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems
What are we still doing?
Fasecolda promotes sustainable investment as a means for the active management of emerging risks, favoring business continuity and supporting the responsible growth of the country. We encourage the inclusion of ESG topics in investment decision-making, as well as the assessment of portfolio exposure to new risks, such as climate change. This is the best mechanism to promote positive change in environmental and social issues in Colombia, the effort is focused on generating an environment conducive to responsible production and consumption, through the economic leverage of environmentally friendly, socially responsible, and economically viable activities (Jiménez, 2020).
More documents related to the exposure of portfolios to emerging risks:
Gauging the exposure to transition risks of Colombian insurers’ investment portfolios
Additionally, in order to provide insurers with mechanisms for the assessment of ESG factors in investment, Fasecolda developed a tool that allows investors to know if the companies they are evaluating comply with or implement ESG factors.
For more information on the tool for assessment or implementation of ESG factors, click here:
Similarly, Fasecolda developed a guide of ESG factors in investment, which provides investors with the instruments and methods to be considered in the investment assessment to establish whether the company applies ESG factors in its corporate policy.
For more information on the ESG assessment tool, please contact us at sostenibilidad@fasecolda.com.