On February 8, 2022, the Italian parliament definitively approved a bill that includes protection of the environment as a fundamental principle of the Constitution.

Specifically, it amended the second and third paragraphs of Article 41 of the Italian Constitution concerning the exercise of economic initiative.

Without prejudice to the precept of the inviolability of human dignity, security and freedom, the second paragraph now also references the health and environmental issues that must always be observed and protected during the exercise of all economic activities. Thus, the law is increasingly focused on enhancing the principles of sustainability.

The financial field by now reflects this approach in the well-known “ESG” criteria, which increasingly permeate the activities of investors, financial institutions, entrepreneurs and companies.

Actually, if in the past investing according to these criteria was only an objective for specific thematic funds, or was an ancillary and rewarding principle, today it has becomes a functional element for the entire investment chain on which basis the individual risk level is determined.

Including “Environmental, Social, Governance” factors, the terms in the ESG acronym, in one’s portfolio certainly improves the risk profile and optimizes long-term return.

So, specifically, what are they?

“Environmental” refers to the environmental factors related to climate change. This criterion seeks to raise awareness for protecting the environment, biodiversity and natural resources, while minimizing harmful emissions into our ecosystem.

“Social” considers the impact of a given activity on the social context where this work is carried out. Inclusiveness, equality, child labor are just some of the parameters considered in this criterion.

“Governance”, on the other hand, evaluates the system by which a company is administered and governed. By verifying certain parameters, such as: economic strategies, the structure of the board of directors, executive remuneration, tax practices, corruption, abuse of office, respect for meritocracy, codes of conduct and various company policies, the risk and sustainability of different companies are assessed. This factor presently affects the creditworthiness of the individual company also and its attractiveness to potential investors, such as private equity funds.

In March 2019, the European Commission also reiterated, by issuing various regulations, the importance of encouraging the development of “responsible” companies and investments, thrusting them towards sustainability.

Value for the shareholders and market confidence are also achieved by integrating the “ESG” criteria in their own conduct and within their administrative, production and investment system.

In my opinion, these criteria are consistent with the aims of what I call – and I promote among the young students at the Gabelli School of Business – discerning leadership. Leaders today must contribute to building a virtuous “biosystem”, where business and profit combine with sustainability and inclusiveness.

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