A Revival of Corporate Interest in Environmental, Social and Governance (ESG): Awareness Matters
Interest within the U.S. institutional investor community for understanding and applying Environmental, Social and Governance (ESG) factors to their asset pools slowed substantially as they faced the economic and financial meltdown in 2008-09. When faced with dramatic negative returns affecting markets here and around the world, being laser focused on asset allocation and portfolio structure is a natural and appropriate reaction.
Now, almost a decade later, we again see investors returning to this important conversation. Investors are more universally beginning to consider the impact of such factors on the sustainability of public companies and, ultimately, on share price and companies’ ability to repay debt.
Additional influences driving this discussion include the greater number of available products being offered by asset managers that integrate ESG considerations, multiple databases utilizing various methodologies for rating and ranking companies’ ESG activities, and increasing outreach by the United Nation’s Principles for Responsible Investing (UNPRI) team*.
Most recently, however, some are raising questions as to whether the global political environment may have an impact either upon corporate responsible actions or investors’ appetites for ESG-integrated investments. We believe there are several strong reasons that support an increasing awareness by all parties for these factors.
- Sustainable practices are truly a global conversation at the company and investor level. In Europe, for example, the European Commission and the European Parliament have endorsed and directed that about 6,000 companies will be required to report on environmental, social, and employee-related, human rights, anti-corruption and bribery matters as well as the diversity policy applied for management and supervisory bodies. This reporting crosses country boundaries.
- A growing number of companies are recognizing that good practices in ESG represent sound operating principles and that both customers and investors are aware of their importance.
- There is an increasing body of evidence via numerous studies that indicate that ESG integration is not injurious to returns, and many indicate that it has a favorable impact.
- The logic that sustainability and corporate success are aligned concepts, not mutually exclusive. Consider key principles of each element.
Environmental – avoiding resource depletion, waste and pollution, and deforestation; reducing emissions
Social – diversity in the workforce; favorable working conditions that exclude slavery, child labor, and other types of worker exploitation, and promote health and safety
Governance – transparency to stakeholders; accountability; fairness; responsibility
These concepts are not related to politics or parties. Involved actors can differ on the degree of importance and these considerations will shift through time, however, the basic ideals transcend elections and are about what is just and reasonable.
In the not too distant future, ESG factors will be akin to valuations, free cash flow and dividends – items any fiduciary/analyst must be aware of in order to complete a 360-degree evaluation of any investment opportunity.
*Segal Marco Advisors is a long-standing signatory of the UNPRI.
Tim Barron, CIO of Segal Marco Advisors, was recently interviewed by Asset TV about this hot topic. Watch the video for an informative discussion about the history – and the future – of ESG investing.