ESG Investing Goes Mainstream: How the London Stock Exchange is Embracing Sustainability

Analyzing the company’s ESG rating is one of the modern approaches to studying investment attractiveness. This article will consider popular ESG investing companies and explain how the London Stock Exchange applies this practice when analyzing the company’s activities.

Intangible aspects of ESG: how reputation affects company value

Modern global transformations in the economy require a review of approaches to assessing the investment attractiveness of companies. Prospective investors increasingly use non-financial indicators as an essential component of management decision-making. It is due to the aggravation of global problems, climate change, and frequent scandals caused by poor corporate governance, the growing influence of business on the social sphere.

The ESG trend has acquired purely practical significance in recent years due to pressure from investors and banks. The rating contains three components:

  • E – environmental includes some measures to reduce emissions of pollutants and waste, prevent the depletion of natural resources, including water, reduce the area of forests, and use renewable resources and their processing (recycling).
  • S – social (social) consists in supporting the professional education of employees, reducing staff turnover, health care at the enterprise, the presence of a “social package,” a culture of “zero injuries,” exclusion of the use of child labor, gender equality, relations with consumers and local communities.
  • G – corporate governance: transparency of information disclosure, consideration of the interests of all shareholders, exclusion of unreasonably high remunerations for top managers and corruption scandals, availability of a long-term company strategy.

ESG ratings, which are formed by independent research and rating agencies – Bloomberg, S&P, Dow Jones, and others – are increasingly used by institutional investors and lenders. Companies are evaluated and scored according to three criteria (E, S, and G). The number of points obtained affects the yield of securities, insurance conditions, interest rates on loans, etc. Having a low ESG rating is not profitable. According to the SustainAbility survey, the number of ESG investing companies is steadily growing and currently stands at 71%.

How does the ESG enchase the London Stock Exchange sustainability?

London is the connecting link between a significant investor base, and the London Stock Exchange is the world’s critical international stock exchange. Today, the London Stock Exchange firmly occupies third place in the world regarding capitalization. It carries out the most significant number of operations with shares of foreign issuers. A total of about 3,000 securities are in circulation. At the same time, London takes second place in trading in derivative securities – options and futures. The LSE’s financial transactions scale is evidenced by the fact that it accounts for 2/3 of the international exchange turnover of securities, including more than 90% of international trade in shares in Europe.

The demand for ESG forces companies on the London Stock Exchange to reckon with the principles of sustainable development. According to the results of a 2020 EY survey of institutional investors, 98% of respondents confirmed that they monitor the ESG ratings of companies with which they do business. ESG plays an increasing role in the investment decision-making process because these factors help to reduce the risks of losses. To obtain this information, investors usually use data provided by companies in the form of environmental reports, reports on corporate governance and social responsibility or sustainable development, and integrated reports. External sources of information are also used, such as press releases and analytical data on company activity obtained from brokers, investment funds, and consulting companies.

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