Environmental, social and governance (ESG) is now viewed as table stakes within certain investment quarters

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ESG is seen as core to the way today's responsible businesses operate. What is responsible investing, and do we continue or start?

ESG is seen as core to the way today's responsible businesses operate. What is responsible investing, and do we continue or start?

ESG (Environmental, Social and Governance) simply put, is framework for a responsible investing practice. Responsible investing is not new, in 1987 Real estate funds began to exclude military lands and controversial sectors such as weapons, tobacco and gaming. The concept of ethical funds, defined as non-controversial investing, is also widely accepted.

However, definitions of responsible investing vary. There are many metrics that can be used by investors or consumers to measure and assess ESG factors. However, with wide parameters and little education, views on ESG can differ.

From its beginnings in 2005 the UN PRI has grown to have over 2.300 signatories and members. An independent, not for profit body supported by (but not part of) the United Nations, the PRI encourages investors to use responsible investment to enhance returns and better manage risks. The 6 principles aim to provide a global standard. Organisations chose to follow these principles to meet commitments to beneficiaries as well as aligning investment activities with the broader interests of society.

Why does ESG matter?

A strong ESG proposition can enhance investment returns. Global sustainable investment now tops $30 trillion. An increase of 68% since 2014. Investors widely recognise that ESG factors should be integrated into investment processes and decision-making. However, the side, perhaps less recognised and equally important, is to understand the corporate purpose, strategy and management quality of a company.

The rules are shifting. Regulatory responses to emissions are likely to affect energy costs and could especially affect balance sheets in carbon-intense industries.

In response to demand from investors for a consistent approach, the London Stock Exchange issued guidance on good practice ESG reporting. They aim to help companies understand what ESG information investors would like to see provided by companies.

These considerations have to be incorporated and managed within the investment process particularly as we see consumers driving change. Climate change has become the highest priority issue facing investors. The commercial challenge remains, and the PRI is working to help investors protect portfolios from risk and to expose them to opportunity in the shift to a low-carbon global economy. Shell have set a renewable energy standard benchmark; however, the ROI is less easy to evaluate with extra costs on green energy.

The challenge is that whilst customers may want ESG factors to be given top priority, companies still need to pay for these. Is the question then for a moral requirement rather than a requirement to be truly green?

Do you get asked about ESG in business today? What about reporting and measurement?

2014-9 have been a key time for ESG stimulating review of cost vs return. Variance of deeper rewards vs green products are becoming hygiene factors. Businesses have found that collaboration is essential to both educate and satisfy investor’s requirements.

Integration, engagement and active ownership of ESG factors are essential within the data framework for analysts who are facing steep learning curves as long term strategies change.

Companies such as CPD (global disclosure system) help investors, cities and states manage their environmental impacts have, in fact, created a system that has resulted in unparalleled worldwide engagement on environmental issues. This add on knowledge provide an overlay to analysis traditional frameworks companies such as MSCI are standardising a new way of thinking.

This is not box ticking. Companies such as EDF have embraced this, changing their business model to transition risk and opportunity to give “best in class” outcome.

However, people remain confused about ESG. When 500 of the largest DC pension scheme providers were questioned, ESG was bottom of the list, and only 40% of companies questioned had a policy on responsible investing.

Do clients and consumers understand ESG or do we need to talk about these factors in a different way? Invesco’s practice management team use language consultants to engage with people and investors to understand their desired outcomes.

If we have a responsibility to ensure investors know what they are investing in, how can we achieve the right outcome i.e. why invest via a company who have a good fund but poor corporate ethics? Will the use of 2-tiered evaluation processes across funds and company ethics achieve a fairer metric? Perhaps we should avoid labelling ESG and instead add it as an integrated concern for investment? Transparency is key. 

We will see this evolution in financial markets as they react to the private sector ahead of government led change. NGOs specialising in animal welfare receive extensive funding, climate action 100 is making a significant impact, the green start up economy is booming in the UK. However, challenges remain that whilst there are options to invest responsibility, often the choice is based on short term vs long term vs cost of return.

Who is driving change? Consumers or the industry? There must be a tipping point.

It will be consumers who drive change rather than policy or legislation. Better, cheaper evaluation from companies will give a balanced metric. By 2050 we expect ESG factors will be reviewed in line with normal investing practices.

The growth of purpose driven companies and the importance in CSR in employment dynamics may be changing the corporate world. Purpose is essential for staff retention and brand choices. We need to be able to measure corporate values across staff and customers.

What consumers and employees need moves beyond an aspiration and evolves into an opportunity for all. We only need look at Greta and David Attenborough to understand the breadth of social conscience.

There remains a need to be authentic.

Recent studies show that a positive social impact also correlates with higher job satisfaction. Increasingly a weaker ESG proposition has the potential to drag productivity down. If charity begins at home, how can we ensure we do enough?

Whilst we must ask customers about their views on EGG ultimately corporate decision making has to include impact on ROI. How do ensure we achieve the balance?

Invesco take their ESG responsibilities very seriously, they have committed to offsetting their carbon footprint, and their 7,000 employees are heavily invested in ESG decision making.

The Fintech market in London is demonstrating how consumers are driving ESG values to build engagement. CPD work on energy risk is forcing a review of the bottom dollar, the ongoing conflict. 

Does leadership play a part? 

In taking responsibility for ESG, corporate supply chains have been broadly left out of the debate. Should measurements metrics take into consideration the limitations of poor supply chains which may be less carbon efficient? Does this area require more education? 

Pension funds also raise debate with the question whether ignorance vs presumption relating to corporate pension investments is a challenge that should be addressed? Can consumers drive change here given the high prevalence of employees who choose default pension fund choices. Who owns the responsibility? And with limited employee insight, language resonates

Individual causes that inspire us vary widely. If a corporate can link ESG priorities to value and leaders can demonstrate how these can feed into the business model, it creates a compelling argument for evolution. 

Can we create a preference by educating customers? Will this be able to impact investing style?

Can we cut the jargon and make it simple? If transparency can be achieved through education, can we demystify ESG and simply call it responsible investment?

Being thoughtful and transparent about ESG risk enhances long term value and whilst there is generally considered to be a long way to go to achieve responsible investing across all areas the market, it has become a key factor in our changing world.


Expert: Maria Lombardo – Invesco

Facilitator: Sarah Collinson – All Clear Insurance

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