INCENTIVES or disincentives for companies to encourage the adoption of environmental, social and governance (ESG) practices would need to be very precise and targeted.
This is so that the outcomes would be in line with expectations so as to not put any crucial industries such as oil and gas or plantations, for example, in danger of an existential threat due to the strong global push on the green energy agenda presently.
“When you try to regulate the economy with disincentives that are clear and sharp – this will really help the economy to change.
“A good example is when slavery was abolished at the beginning of the industrial revolution by giving rights to the workers – everyone thought this would be a disaster,” Italy-based asset management company Etica Sgr’s chairman Ugo Biggeri tells StarBizWeek.
“But eventually it was done in quite a simple and smart way such as giving limits to working hours. Minimum wages were also introduced then.
“What happened then was that the industry performed a lot of innovation as they understood that labour is no longer so cheap – so work productivity increased a lot.
“We don’t have to be afraid to put regulations to direct the economy to a low-carbon economy,” Biggeri adds.
Etica Sgr is the asset management arm of Banca PopolareEtica Group and focuses on ethical investment funds, with a high profile of social and environmental responsibility investments.
As for the petroleum or carbon-based economy, Biggeri acknowledges that petroleum is very prevalent in modern society and it even forms a part of our existence.
“Petroleum is everywhere – even in the things we eat – not that we eat petrol but a lot of oil is used to produce the things we eat. So if let’s say we let go of petroleum tomorrow, it would definitely be a disaster,” he says.
“But in the longer term, we have to rethink the use of oil and there is a huge amount of work to be done here – new developments and technologies and new work, including investments that economies would need to do to make this transition,” he adds.
He highlights the example of the production of glass and steel, which needed a huge amount of energy and heat that can only be delivered by oil.
“We can’t produce this without using oil because we need so much heat that cannot be delivered by other forms of energy. However, there is a lot of other things we can change – with this, we need more infrastructure, investments and jobs,” Biggeri says.
Notably, he points out that there is a lot of wealth that can be gained for the people when an economy or country manages to leapfrog into new industries from the development of green energy – such as electric vehicles, scooters, batteries or energy storage systems.
“Some countries that can successfully leapfrog into these new technologies can jump directly into the new industries and will profit from it,” he says.
He says due to the widespread availability and advanced development of wireless communications and mobile phone technology today, some lesser developed countries are able to provide telecommunication services for their people without having to invest in wired communications infrastructure.
“The Organisation for Economic Co-operation and Development or developed countries had spent a lot of money to build this network of wires all around their countries. But now in Africa you don’t need to build such things because you just need to use your mobile phone for communications,” Biggeri says.
“Technology enables such leapfrogging and this allows countries that have not invested so much in infrastructure to be as good as countries with more economic wealth. I think this could also happen with the development of green energy,” he adds.
Meanwhile, Biggeri says asset managers have a significant role to play in giving a push factor for companies to adopt ESG best practices in their operations.
“Asset managers are directed by their customers. There are investors who would like their money to be used only for their ideologies and ethical rules. These can influence ESG outcomes. It’s like consumer activism in some sense of it,” he says.
He notes that pressure from regulators and shareholder activism from retail and institutions would eventually advance the cause of ESG, especially pertaining to climate change.
“In shareholder activism, you can give bonuses or variable incomes to the top management that is not just connected to their annual incomes by setting goals on ESG investing outcomes.
“For example, giving a financial incentive if 10% of a portfolio are ESG-compliant companies – this would see them quickly reaching such goals or internal targets,” Biggeri says.