What is ESG and why is it important?

It was once universally understood that institutional investors’ main objective, and the investee company’s main obligation, was to maximise short term returns for shareholders, without regard for other factors like social and environmental impacts.

Now, with the rise of the ‘responsible investment’ movement, consideration of ESG is seen increasingly as part of a shareholder’s fiduciary duty, in both the US and EU markets. Forbes

What are ESG criteria?

ESG can also relate to:

  • ESG reporting — the data disclosed relating to ESG criteria e.g. 300T GHG emitted in 2018
  • ESG performance — how companies are performing in ESG domains
  • An ESG score/rating — an assessment by a third-party organisation of ESG performance

ESG: the journey, not the destination

To impress this segment of socially conscious investors, it’s necessary to maintain a high ESG rating by looking at how you’re conducting your business operations, not just how much money you’re making.

The ‘3 pillars’: Environmental, Social, Governance

Investopedia defines ESG criteria as the following:

Environmental criteria consider how a company performs as a steward of nature. This includes:

  • Action on climate change
  • Greenhouse gas emissions and reductions
  • Water usage

Social criteria examine how it manages relationships with employees, suppliers, customers and the communities where it operates. Themes include:

  • Labour standards
  • Health and safety performance
  • The way a company treats clients and customers

Governance criteria deal with a company’s leadership, executive pay, audits, internal controls and shareholder rights. This includes:

  • Anti-corruption measures
  • Tax transparency
  • How are decisions made across the executive board?

Why is ESG important?

  • More attractive to investors. Green investment funds and socially responsible investors are more likely to fund companies with good ESG scores.
  • Better performance. A study by leading asset manager Amundi, showed that between 2014–2017, its portfolios with high ESG scores outperformed competing investments. Source
  • Better financial indicators. MSCI reports that high-ESG companies experience lower cost of capital, less volatile earnings and lower market risk compared to low-ESG companies (MSCI)

Additionally, KPMG reports some examples of long term benefits created by ESG activities. Source

  • Adaptability. Evolving business models minimise the impact of disruption from technology or regulation.
  • Prepared for Regulation. The adoption of or investment in renewable energy infrastructure and technology to reduce carbon emissions and costs arising from environmental tax or payments for offsetting carbon emissions.
  • Innovation. Technological advancements in fostering a sharing economy that promotes innovation and improves efficiency.
  • Positive brand image. Companies with high ESG values may experience better retention rates and a more positive brand recognition amongst their staff and customers

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Product Visionary & Co-Founder - CarbonClick