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The Importance Of ESG - Environmental Social and Governance
Investing has evolved beyond just the pursuit of profit. Today, investors are also looking to make a positive impact on society and the environment through their investments. This has given rise to the concept of ESG, which stands for Environmental, Social, and Governance.
ESG investing takes into account not only a company's financial performance but also its impact on the planet, people, and governance structures. In this blog post, we'll explore ESG and its importance in investing, the benefits it offers to investors, and how it can help drive positive change in the world.
Key Takeaways
- ESG investing takes into account a company's financial performance and its impact on the planet, people, and governance structures.
- ESG criteria guide investors in sustainable investing through non-financial KPIs.
- Incorporating a strong ESG strategy would help to mitigate costly risks by lowering operational costs, increasing employee retention, and efficient allocation and management of resources.
- The impact of COVID-19 has shifted things around, but organizations with strong ESG policies and programs may help to mitigate its impact.
Disclaimer
The contents of this article are for educational purposes only. They are not intended to be a source of professional financial advice. You will find experts on financial planning, financial management, and real estate here. More on disclaimers here.
What is ESG and Why it Matters?
ESG stands for Environmental, Social, and Governance. These three factors are key in measuring sustainability when it comes to investing.
Investors pay much attention to ESG considerations. This is because they play a critical role when it comes to projecting for the future financial performance of a company, long-term decision making on the investors' side, as well as risk analysis and risk management principles and practices.
The ESG concept was derived from the ‘PPP - People, Planet & profits’ concept in the 1990s to guide the area of impact investing. The argument was that companies and businesses should not only focus on profits and financial gain but also on the other P’s - People & Planet as these two factors were equally as important to the sustainability of any business, company, or commercial enterprise.
The PPP evolved to what is today known as ESG which forms the basis of sustainable and socially responsible investing. The three main ESG criteria; environmental, social, and governance also form a basis for non-financial KPIs which in turn guide investors when it comes to sustainable investing.
These factors are key when it comes to investing as they give different companies a sense of responsibility towards the larger world by being mindful of how their activities contribute positively or negatively to issues like climate change, pollution, carbon footprint etc.
Same goes for the environmental social and corporate governance aspect when it comes to issues like diversity, health and safety, employee performance, executive compensation, corruption & bribery, and board of directors diversity.
ESG - Environmental Social and Governance
Below are the three main ESG metrics:
Environmental - The environmental aspect examines how a business contributes and works toward addressing environmental issues like waste management, pollution, greenhouse gas emissions, climate change, deforestation, etc. This is a key factor that is considered when it comes to sustainable investing.
Social - The socially responsible aspect deals with how a company/enterprise treats & interacts with its employees/people. E.g. diversity, equal opportunities, health & safety, etc.
Governance - The governance aspect deals with how a company is governed. E.g. Tax strategies, executive compensation, corruption & bribery, board of directors diversity & structure, etc.
Importance of ESG
Over the recent past, there has been quite some emphasis on ESG investing. Here are some reasons why all companies should have a proper ESG framework in place.
Environmental
Environmental Companies that create environmental risks or hazards, be it on water, air, land, or human health can eventually lead to the rise in operational costs and stand a lower chance when it comes to getting investors.
This is because such companies are more likely to experience wastage when it comes to energy consumption, regulatory issues with the relevant bodies as well as reputational risk.
Incorporation of a strong ESG strategy would help with mitigating such costly risks by lowering operational costs through efficient use of energy and compliance when it comes to the regulations laid out to avoid reputational risks.
Social
Socially responsible companies tend to have higher employee retention. and therefore, investors may lean more towards working with such a company as opposed to one that has no ESG framework in place.
A company that puts into consideration their employees' health & safety first and also regards aspects like diversity and human rights, is more likely to have a higher retention rate, increased productivity and morale, and also employee loyalty as compared to a company that disregards these aspects.
Governance
Governance or corporate governance mainly deals with how a company is run and managed by its leaders and stakeholders. This aspect helps to reduce the risk of excess executive compensation, diversity within the company or organization, board accountability to its members as well as stakeholders' rights and responsibilities.
With good governance comes efficient internal processes, better allocation, and management of resources as well as improved relations among the different company stakeholders.
Overall, a proper ESG framework promotes the all-round growth of a company, eases the potential investment process, and helps to mitigate future risks in line with ESG compliance.
Impact of Covid 19 on ESG Investing
COVID-19 is a crisis that has hit the entire world economically, socially & healthwise. It has caused a lot of disruption globally and shifted things around. However, organizations with strong ESG policies and programs may help to mitigate the impact of the pandemic to help people navigate their “new normal”.
Organizations that have invested in proper and well-functioning ESG investing programs can stay afloat at this time as they have the ability to mobilize their task force/employees and or new resources.
In these uncertain times, a company culture built on trust, commitment, and proper communication keeps the morale of the employees up and thus they stay motivated and productive with very minimal supervision.
When it comes to the governance aspect, the emergence of COVID-19 brought to light the importance of business aspects like flexibility in working, business continuity planning, disaster preparedness as well as sustainability in business.
Some companies that have demonstrated concern towards society by being solution-oriented include Apple and Tesla who have directed their resources to increase accessibility and production to critical medical supplies. Distilleries such as Pernod Ricard and Bacardi have redirected their efforts towards producing hand sanitizer which is a much-needed commodity at this time.
When companies/organizations take initiative in being part of a solution and add value to their societies by extending goodwill to the community around them, there is more trust in the leadership style.
This in turn helps to create a trusting & mutually beneficial relationship between the organization and the community at large. It also makes the company an attractive entity to investors for future partnerships.
Why is ESG important for companies and investors?
Having seen how COVID-19 has caused a lot of disruption all around, let's consider useful steps that organizations that don’t have proper ESG investing frameworks can consider taking into account:
Engaging and protecting the social aspect in your organization
Human capital is among the most important resources in any company or organization. The company culture, trust, and transparency now matter more than ever in any organization as these are the aspects that are keeping human capital motivated and goal-oriented even as people continue to work remotely or from home.
Good company culture will keep employees and other members of the company focused on the goals at hand as well as make them solution-oriented to the challenges that come up in the workplace. Also, concern for employees at the workplace is very critical with the new measures set in place for co-existence in public spaces.
Organizations that put their employees' health first by implementing health and safety measures are more likely to attract investors as ESG compliance is an important factor that’s put into consideration.
Communication with stakeholders
Stakeholders are among the key human resources in any organization. With the emergence of COVID-19, organizations must generate a communication plan with their stakeholders to inform them of how they are addressing the crisis as well as reiterate their commitment to the pre-existing values, especially during this hard time.
Opposing views to ESG investing
The importance of ESG investing in any company is invaluable as it caters to the three core aspects. However, some companies - especially SMEs might find themselves on the other side of the spectrum due to factors like high employee turnover, limited resources, etc.
Lack of proper organizational structures might also limit the effectiveness of ESG investing implementation in an organization because, for smaller organizations, the priority would be in the setting up and running the business for sustainability.
Here are 5 ESG benefits for businesses
- ESG reporting builds customer loyalty
- ESG improves businesses financial performance
- ESG disclosures sets you up for long-term success
- ESG performance makes company operations sustainable
- It offers a competitive advantage in the fight to attract and retain talent.
Incorporate ESG practices into company culture
To promote sustainability and social responsibility, companies can integrate ESG practices into their culture. This requires a clear plan for implementation and oversight, which should identify the parties responsible for the ESG program.
Furthermore, it's important to ensure that all public-facing information aligns with the company's ESG disclosures, to maintain transparency and build trust with stakeholders.
Conclusion
Incorporation of a functional ESG investing framework in an organization is not only vital, it also helps in maintaining clarity when it comes to an organization’s goals and overall vision, as well as the well-being of the human resource. It helps to cater to the needs of all stakeholders by ensuring that all the important needs are met and all-important guidelines are adhered to.
Companies and businesses that push for greater ESG performance and ESG reporting are those who will fall on the good side of investment decisions in the years to come.
Bay Street Capital Holdings
Bay Street Capital is a signatory for the United Nations Principles of Responsible Investing. We invest with high conviction, through the lens of history, in organizations we believe will outperform.
We cover clean energy, economic empowerment, and education technology. We write about, ESG Investments, Socially Responsible Investing, Sustainable Investing, ESG Factors, ESG Ratings, ESG Issues, ESG Data, MSCI ESG Investment, Political Contributions, ethical investment decision making, ethical portfolio allocation, and market research concerns across the industry related to recent years ESG mutual funds, Impact investing, and conflicts of interest.
William Huston founded Bay Street after 13 years of supporting the United States' largest retirement plan ($650B) Thrift Savings Plan. He is recognized as Investopedia’s Top 100 Financial Advisors for 2021. In California, only two black-owned firms out of nineteen firms received this recognition.
In Scottsdale Arizona, Ekenna Anya-Gafu CFP, AAMS is recognized among the Best Financial Advisors for his responsiveness, friendliness, helpfulness, and detail. Bay Street was founded to advocate for diverse and emerging fund managers and entrepreneurs. In 2021, Bay Street was selected as a finalist out of over 900 firms across the US in the category of Asset Manager for Corporate Social Responsibility (CSR).
Sources
https://www.cfainstitute.org/en/research/esg-investing
https://www.esg.adec-innovations.com/about-us/faqs/what-is-esg/
https://learningcenter.sourceintelligence.com/esg-frameworks
