Over the past few years there has been an ever-increasing trend and discussion amongst institutional investors to environmental, social and governance (ESG) investing. Driven strongly by Europe and more slowly being adopted by North America, Asia and the rest of the world – each investor, consultant and manager has their own take the topic.

Loosely speaking, ESG investing is a term that is often used with sustainable investing, socially responsible investing, mission related investing or screening. Wide-ranging environmental, social and governance issues are considered alongside financial factors for investment decision making and its sustainability. The topic is broad, and many consider different metrics and data to form their opinions. Factors typically might include climate change, human capital and labour management, corporate governance, gender diversity, privacy and data security amongst others. Companies from different industries may be faced with very different ESG risks and opportunities and should therefore be looked at individually.

BlackRock, the $6.3 trillion asset manager and its CEO, Larry Fink, has been vocal on the subject. In 2018, he sent a letter to public company CEO’s outlining his expectation that they start accounting for their effect on society or risk disappointing the largest asset manager in the world.

Simply managing for short-term shareholder profit is not an acceptable management strategy, according to Fink. “Society is demanding that companies, both public and private, serve a social purpose,” Fink wrote. “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”

Below is a graphic that shows that close to three quarters of North American institutional investors, around seventy two percent, currently use or plan to use ESG in their investment considerations, meaning that it is an important factor to consider for all sized companies.

We can see while all ESG factors have grown in importance over the years, increasingly the social issue is even more relevant including such issues as diversity, modern slavery, supply chain safety and equality of women in the workforce. If we look back to 2013, we saw the Rana Plaza building in Bangladesh collapsing catastrophically, killing more than 1,300 people with thousands more injured. After the dust settled so to speak, companies were slow to acknowledge their links to the factory and take responsibility in their supply chain outsourcing and the conditions that workers are subjected to. Big pension funds and asset managers have subsequently started calling for more transparency, so investors can be certain companies are valuing their workers and the conditions in which they work.

In order for investors to get to grips with important data they need to have some kind of information and standard for which to evaluate their decisions and engagement with Boards. Much of this data is not yet standardised or is fragmented and inconsistent. Other examples of why ESG is important can be seen in the multiple data privacy breaches customers have seen, emissions control scandals and sexual harassment disgraces corporates have seen over recent years. All of these are important for many reasons but there are also important non-financial factors that can directly impact share prices and affect investor returns.

So, while some will never consider an investment in say the energy sector or the alcohol industry for various reasons, it is important for companies, no matter the size or market cap to position themselves as favourably as possible to potential investors and future investment opportunities. It also just makes good corporate sense and business practise to employ a solid ESG policy and guidelines.

Sources:

IR Magazine
Greenwich Associates
Business Insider
MSCI Consulting
Ken Fisher, Fisher Investments