Environmental, Social, and Governance (“ESG”), also known as socially responsible investing, has been a growing investment category the past few years. Many publicly traded companies around the world either have or are beginning to adopt ESG policies. As a general rule, these policies are developed though consideration of:
- Environmental: Tracks a range of issues including a company’s carbon footprint or how a business has adapted to climate change;
- Social Issues: Can include product-safety problems and labor abuses in supply chains; and
- Governance: Assesses the quality of a company’s management and whether the board maintains sufficient oversight.
Investors can measure the relative ESG performance and effectiveness across nine main themes within the three verticals of ESG:
- Environmental; resource use, emissions, product innovation;
- Social; workforce, human rights, community, and product responsibility; and
- Governance; management, shareholders, and Corporate Social Responsibility (“CSR”) strategy (creation of economic value with that of societal value in mind).
In addition to providing investment value, a strong ESG proposition can help companies attract and retain quality employees, enhance employee motivation by instilling a sense of purpose, and increase overall productivity. Employee satisfaction is positively correlated with shareholder returns.
On the heels of CSR, ESG investing has been building momentum since 2005. Today, ESG investing is estimated at over $20T in AUM. The rapid growth and adoption built on the Socially Responsible Investment theme (“SRI”), has been a natural progression, as we see new solutions to enhance investment opportunities while being environmentally aware. Many believe that soon we might find ourselves using an ESG based benchmark to use as a proxy to gauge ESG compliance and/or friendliness in the investment selection process.
Therefore, it is important for investors to recognize the changes in the tide, build awareness, and encourage companies to seriously consider the value proposition ESG can generate.
As we experience the unprecedented impact of COVID-19, the shock to the markets is a reminder that Environmental, Social, and Governing characteristics of a company, measures the sustainability and societal influence which can affect the financial performance of businesses.
Investors are in a unique position of influence in getting more companies to recognize the value of being an environmentally and socially conscious organization. And, this investment philosophy standard could yield strong fundamental performance in competitive market environment, while elevating the company’s standing as a Corporate Socially Responsible organization.