Investor interest in more responsible investments and skepticism towards controversial securities is a growing global trend and one that Greece is having trouble keeping up with.
Fund managers and institutional investors are increasingly including three non-financial factors in their investment strategies: the environmental, social and governance (ESG) factors that will play a key role in determining their priorities and next investment moves. These factors are being taken into serious account by funds managing large amounts of assets, as well as by such corporate giants as Royal Dutch Shell, which have come under increasing pressure to reduce their environmental footprint.
Data by Morningstar surveyors showed that the total value of assets managed by European ESG funds in end-2018 came to 684 billion euros, up from 537.7 billion in 2017. The growing interest by funds in ESG indexes in the first half of this year, meanwhile, is reflected in a Fitch survey recently published by The Financial Times, which shows that the assets managed by the ESG-orientated funds have grown 15 percent year-on-year.
Jason Channell, head of sustainable finance at Citi Global Insights, tells Kathimerini that there are many reasons for the growth of interest in ESG investments.
“The main one is that we have seen a fundamental shift in the attitudes of the ultimate asset owners, away from a focus purely on the quantum of financial returns, to a focus on how those returns are generated, as well as how big they are,” he says. “There are many sub-reasons, such as a period of low returns on many asset classes driving a desire to do something good with the capital – societal returns if financial returns are harder to find, but again, there is an increasing focus generally on the sustainability of business models, a desire to be associated with longer term sustainable business models, or conversely a reluctance to be associated with industries or companies which appear to be profiteering at the expense of someone or something else (such as the environment) in the short term. Also, a recognition of the risks posed by unsustainable business models and the implications of a business losing its social license to operate. Also worth noting that these attitudes are not shifting at the same speed around the world.”
Morningstar ranks Greek businesses around average regarding its total performance in the ESG indexes, but when it comes to corporate governance in particular they fall considerably below other countries of the European south such as Italy and Portugal. This is hardly a surprise given the recent cases of mismanagement and corporate scandals that have rocked the domestic market.
“Greece’s performance in corporate governance – without referring to the case of Folli Follie – has been deteriorating steadily in recent years, recording the biggest decline among the countries in Central and Eastern Europe, Middle East and Africa,” Nikos Avlonas, founder and president of Greece’s Center for Sustainability and Excellence, tells Kathimerini. “The legislation on corporate governance in Greece does not appear sufficient, even without knowing to what extent it is implemented,” he adds.
Greek firms have made minimal progress in incorporating strategies with an environmental orientation, according to Morningstar, though the country’s performance has been more satisfactory on the social index. The problem, according to Avlonas, is that local firms have failed to grasp importance of ESG indexes.
“Although several listed firms or large enterprises in Greece fulfill certain ESG criteria and annually publish sustainable growth reports, their senior officials have yet to sufficiently realize how important it is for potential investors to have the appropriate transparency standards for sustainable growth. Therefore, a large share of listed firms in the private and public sector are less attractive for investment and do not know how to woo major funds,” notes Avlonas, who is also a visiting professor on sustainability at the Athens University for Economics and Business.
Avlonas adds that under certain conditions Greek corporations could attract ESG-minded funds “provided that they implement the necessary changes to their strategy, such as incorporating ESG practices and applying the right standards with the publications of annual sustainable growth reports.
“What would significantly help in that direction would be the better and clearer publication of the ESG indexes included in firms’ non-financial data reports, as well as the better communication with the investor relations departments so as to improve understanding of investors’ needs. After all, annual financial reports no longer suffice by themselves for a proper assessment and facilitation of investment decisions,” Avlonas argues.
The country element is also significant for Greece. With a new government in office and the record low recorded in state bond yields, Citi’s Channell says that ESG factors are “becoming increasingly important at a sovereign level, in part due to the rising importance of environmental, social and governance factors in credit.”
On the corporate level, Avlonas adds that “there ought to be a stricter framework by the state, along US standards, with the imposition of big fines when required, which has not happened today. Furthermore, if the right groundwork is done for a more stable financial and tax framework, Greece could become a more attractive prospect for investors, which would also have a positive and immediate impact on society and the economy.”