Tag: Sustainability

Importance of ESG for investors and companies seeking potential investments

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Environmental, social, and governance (ESG) criteria has become an essential part of the investment process.  Depending on the availability of data, ESG can be integrated into the investment process for making decisions.  It can also highlight companies that may carry a greater financial risk due to their environmental or social or governance practices.

In a nutshell, the ESG criteria is a set of standards for an organisation’s operations that can be used to evaluate the organisation. Investors look at a broad range of behaviours under the three topics of ESG:

  • Environmental: It considers how an organisation performs its responsibility towards environment and its sustainability. The criteria may include its use of energy, treatment and disposal of waste, handling of pollution, conservation of environment, preservation of natural resources, management of environmental risks and compliance with various environmental protection laws
  • Social: It considers how an organisation manages its conduct with customers, suppliers, employees, and the communities. The criteria may include its values and policies which drive business relationships with customers and suppliers, trade practices, working conditions of employees, health and safety records, consideration of community interests in projects, and so on.
  • Governance: It considers how an organisation deals with leadership, executive pay, internal controls, and shareholder rights. The criteria may include transparency of accounting methods, appointment of board members, conflicts of interests, anti-bribery and corruption policies, political relationships, and protecting shareholder interests.

It is unlikely that an organisation scores the best in all criteria. It is still an evolving topic, and most companies are on a journey to transform their businesses, in support of ESG considerations. Depending on industry sector and geographies in which they operate, some companies would have progressed well in some of the criteria whilst still working on the others. In the meantime, investors, of course, need to decide what’s most important to them in making their investment decisions.

ESG

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ESG is the latest acronym which you see everywhere in the corporate world.  Boardrooms, senior management, consultants, press, webinars or blogs, everyone talks about the importance of ESG.  Every policy, strategy, or investment is now evaluated with an ESG lens.  You just can’t miss it!  So, what is it?

ESG stands for Environmental, Social, and Governance (ESG), a term which first appeared in the August 2005 Conference Report ‘Investing for Long-Term Value’. The conference in Zurich, Switzerland was part of the Who Cares Wins initiative by the United Nations Global Compact, voluntary corporate citizenship initiative launched by the United Nations Secretary-General Kofi Annan. The objective of the conference was to Integrate environmental, social and governance value drivers in asset management and financial research.

Subsequently in April 2006, the United Nation’s Principles for Responsible Investment was launched by the UN Secretary-General.  The principles were developed during a nearly year-long process, coordinated by the United Nations with participation by a group of the world’s largest institutional investors, who became the initial signatories to the principles.  It also resulted in the formation of The UN Principles for Responsible Investment (PRI), an international organization that works to promote the incorporation of environmental, social, and corporate governance factors into investment decision-making.

There are six Principles for Responsible Investment, which have been adopted by the signatories, to develop a more sustainable global financial system.  These six Principles for Responsible Investment offer a menu of possible actions for incorporating ESG issues into investment practice. They are as follows:

  • Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
  • Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
  • Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
  • Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
  • Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
  • Principle 6: We will each report on our activities and progress towards implementing the Principles.

There are more than 2500 participating financial institutions. These institutions participate as signatories and file regular reports on their progress towards implementing the six principles in making their investments.