ESG issues — environmental, sustainability and governance — are being talked about much more these days. Once an optional disclosure for public companies, SEC rules could soon require ESG reporting. And further, ESG disclosures seems to be making their way into private deals. But rather than think of ESG as a compliance issue that results in a punishment if not followed, it’s more about financial materiality, says Amantia Muhedini, Sustainable Investing Strategist at UBS.
She says almost every month prior records are beat for net cumulative flows in ESG funds. Data she cites from the Global Sustainable Investing Alliance indicates that at the beginning of 2020, professionally managed assets that in one way or another consider sustainability, reached $35 trillion. For the U.S. public markets, the estimate is that one in three professionally managed dollars is somehow considering sustainability.
“I'm not saying that all of these strategies have a sustainability objective and focus,” Muhedini says. “Instead, what this is indicating is that a lot of traditional asset managers are increasingly finding themselves integrating, considering proactively, asking these questions around environmental and social and of course governance issues of the companies and about their strategies.”
The reason why they're doing this is multifold. Institutional investors are leading the charge and demanding this, and individual retail investors are asking and following suit. Regulators have also come into the space and have begun to scrutinize how asset managers are doing this and ask for transparency. And also increasingly regulators are asking companies to disclose.
Most recently, she says the SEC Chairman Gary Gensler, just this summer, issued a statement saying that he expects the SEC in the next couple of months to propose a rule that would mandate companies to disclose on their climate risk, for example.
“All of this comes together around one important concept, which is very important to underline,” she says. “ESG is about financial materiality. So all of this conversation, all of this drive towards asset managers considering sustainability, it's really about looking at this new lens that we can add to look at other ways at understanding what is financially material for companies. You can't predict future, naturally, but that is one of the ways in which ESG may be making its way into potentially the M&A market in the future as well, following the same path and logical standpoint of looking for financially material information through the ESG lens.”
Muhedini spoke at the recent Philadelphia Smart Business Dealmakers Conference, along with UBS Financial Services Managing Director Ted Durkin, and Ben Franklin Technology Partners of Southeastern Pennsylvania President and CEO Scott Nissenbaum, about ESG issues and how they might play out in the M&A market. Hit play on the video above to catch the full panel discussion.
