What are ESG criteria and why are they important?
The key for socially responsible investors
Reading time: 9 min
We find ourselves in a context where citizens, associations, organizations, and institutions share the same challenge: solving climate change. To achieve this, a safe bet is implementing sustainable strategies to preserve and respect the planet’s natural resources. We know that a corporation’s decisions can have a positive impact on the environment and society in general. Therefore, it's important to evaluate each action of a company holistically, i.e., as a whole, and not individually. In this sense, it is desirable for each organization to communicate its mission, vision, and values and provide objective and transparent information on its activity.
In this new context, the ESG — Environmental, Social, and Governance — criteria have become very important in recent years and have led to the figure of socially responsible investors. In other words, environmental, social, and good governance factors are the most valued by today’s investors, apart from financial results. This is not a trend, but the new behavior and concerns of shareholders who are focused on companies committed to the environment, society, and good corporate governance practices.
The S in “Social” considers the impact that the organization can have on its immediate social environment.
G for “Governance” refers to corporate governance within the organization.
The first of these therefore encompasses the effect of companies’ activities on nature. Organizations must not only mitigate the possible negative effects of their activity, but are also required to take actions that generate a direct positive impact such as, for example, reducing pollution, waste generation, or emission of greenhouse gases.
The second area analyzes the relationships with the communities where the company is present, assesses whether human resources are promoting equality and diversity among the workforce, as well as social inclusion. These actions must seek the creation of a healthy environment for both human capital and the local community in general.
Finally, the last area comprises issues related to the corporate governance of the company, its purpose, culture, production processes, and management. For instance, in this area, corporate governance can carry out the following tasks: consider the composition and diversity of the board of directors, draw up a code of ethics and best practice guide, check the supply chain to ensure compliance, and provide transparent tax information in its statements and all public information.
What opportunities do ESG criteria offer?
The World Bank issued the first green bond in history in 2008, and in just 10 years, ESG criteria mobilized more than $500 billion worldwide in sustainable investments. A large number of projects focused on renewable energy and energy efficiency were developed. It also led to major advances in areas such as sustainable mobility, agriculture, and sustainable infrastructure. And this does not end here, this trend is currently focused on fighting against the major problems we face today such as:
Why are ESG criteria important to investors?
An investor is anyone who commits capital to a project or company with the aim of making a profit. However, we've seen a trend defining the last few years in terms of sustainability. Today, economic gain is not a sufficient argument when it comes to investing.
ESG criteria are key to investors’ decisions. This philosophy is what “Socially Responsible Investors” (SRI) are committed to. These investors study many variables beyond economic profit and are more concerned with the how than with the what. How the company is going to meet its objective, and how its activity is going to impact the environment.
When an investor is looking for an organization to invest in, they'll consider the company’s position and the ESG criteria. Today’s investors study, analyze, and choose forward-thinking organizations to make sustainable investments that ensure the well-being of all stakeholders in the long term.
Moreover, according to the research paper “ESG factors impact the risk-return ratio” by the Spanish Institute of Financial Analysts, “taking into consideration sustainability aspects improves the risk-return ratio of portfolios.” We can say that companies that integrate ESG criteria and are more committed to society, obtain higher returns and generate a positive impact on all parties involved.
Repsol and ESG criteria
Our investors are committed to socially responsible investment and value positively our strategy to become carbon-neutral by 2050.
34.1% of our institutional shareholders follow ESG criteria upon making their decisions and take into consideration the social and environmental impact.
To quantify this, we create a comprehensive annual report on interaction with socially responsible investors regarding environmental, social, and governance issues. We also share our sustainability and corporate governance KPIs transparently and effectively. In this regard, we believe that dialogue with investors is fundamental to fight against climate change within the sector.
At Repsol, we are part of a sustainable future. That is why we organize events aimed at our socially responsible investors, where we explain how we are going to achieve our objectives for a decarbonized future. To this end, we provide clear and truthful information and have the necessary technology and project execution that will enable us to become a net zero emissions company by 2050.
Moreover, we were ranked as industry leaders in the 2020 and 2021 Corporate Human Rights Benchmark for our achievement of the SDGs (Sustainable Development Goals).
To make all this a reality, we're developing a wide range of innovative technologies convinced that, in order to address the challenge of decarbonization, all of them are necessary and provide solutions to climate change. We rely on different lines of action, such as increasing our renewable generation capacity, developing projects throughout the renewable hydrogen value chain to lead this market in the Iberian Peninsula, and our commitment to the production of synthetic fuels with a low or zero carbon footprint for mobility. With the implementation of these guiding principles, we'll achieve our goal of zero emissions by 2050, in line with the Paris Agreement and the UN Sustainable Development Goals.
Finally, as a result of all our actions, we were publicly recognized in 2019 by Climate Action 100+ for our ESG communication best practices. In 2020, we were included in the FTSE TPI Climate Transition Index, the only stock market index aligned with the Paris Agreement.
