The importance of environmental, social and governance (ESG) factors to current investment trends


When did an ethical and sustainable investment strategy become a serious consideration for shareholders, investors and asset managers?

The global investment focus of shareholders, investors and investment managers is shifting. We are currently seeing wealth being transferred to millennials, environmental disasters, costs and risks increasing, and the performance of operations being improved through sustainable practices.

The importance of environmental, social and governance (ESG) factors in investment decisions, as the Boston Consulting Group in their recent article “Investors Care More About Sustainability Than Many Executives Believe That 75% of Investment Firm Managers are ESG” factors as essential for your investment decision. The discrepancy is evident that only 60% of companies have a sustainability strategy and only 25% have developed a clear business case for sustainability.[1]

ESG encompasses a wide variety of effects on the risk and return values ​​of an investment. These issues can be related to regulatory changes, business ethics, or a direct impact on financial, operational, strategic, or reputational risk. Examples of such risks are:

Environment: natural resources, waste, climate change, pollution and clean technologies.

Social: health and safety, local community, human rights and human resources.

Governance: compliance, regulation, reporting, conflicts of interest at employee, shareholder or board level.

The transition from purely fundamental investment approaches to taking into account the medium to long-term impact of our business decisions in the environmental, social and governance areas will affect the market from small to medium-sized companies, suppliers, manufacturers, supply chains, agribusiness, healthcare, large corporations, to listed companies up to towards multinational corporations. Investment and capital flows drive our economies, and the complex ecosystem of the global economy understands the value of a sustainable ESG strategy where they want to put their funds.

The Australian market usually has difficulty coming to terms with the assessment of environmental, social and governance business policies and often does not consider them to be cost effective. ESG reporting in Australia has not been a critical process for public companies until recently, and investment in internal ESG risk mitigation strategy is minimal.

The range of environmental impacts on businesses and their operations can vary significantly, and some organizations are better able to make better use of them than others. Quantifying environmental risks is a difficult process in terms of monetary value, but the transition to a low-carbon economy is a major driving force. Achieving a low carbon economy requires investment in improving operational efficiency in energy, waste and water use through the use of clean technologies.

Social impact and risk require an analysis of the intangibles of a company that cannot be found on the balance sheet, such as culture, employee productivity, customer relationships, health and safety, community engagement and sustainable supply chains. Social business decisions are often associated with ethical issues related to profits. While not often having a direct impact on company performance, social affairs and ethics are an important process in modern business practice.

External analyzes of business governance processes can also present challenges. Company behavior, decision-making, and policies require extensive reporting from public companies, which is usually packaged in large amounts of data. A clear example of governance risks was Volkswagen’s diesel emissions scandal in 2015. The EY report Tomorrow’s Investment Rules: How global institutional investors are use ESG to information decisionmaking in 2015 (2015) mentions that “almost two thirds of respondents believe “that companies do not adequately disclose ESG risks.”[2]

Harvard Sustainability Review (2012) conducted a head-to-head comparison between high sustainability and low sustainability organizations of similar size, activity and sector. ‘In particular, we have been tracking corporate performance for the past 18 years and have found that companies with high sustainability outperform companies with low sustainability in terms of both stock markets and accounting.[3]

The ability to improve ESG performance is critical for both public and private companies. Investing in sustainable practices improves long-term results, mitigates risk and is an important part of business today. Although investor-driven, companies need to understand the importance of comprehensive ESG reporting, develop a sustainable strategy, and build an ethical business culture. The educated, ethical investor and consumer of the 21st century is there and values ​​sustainability.

[1] Unruh, Kiron, Kruschwitz, Reeves, Rubel, Meyer Zum Felde, GU, DK, NK, MR, HR, AF, 2016.Investors attach more importance to sustainability than many executives believe. 1st edition Global: Boston Consulting Group.

[2] Bell, Gordon, MB, JG, 2015. The Investment Rules of Tomorrow: How Global Institutional Investors Use ESG for Decision Making in 2015. 1st edition Global: Ernst and Young.

[3] Eccles, Ioannou, Serafeim, REIIGS, 2012. The influence of corporate sustainability on organizational processes and performance. 1st edition USA: Harvard Business School.


Source by James Cronan