Environmental, social, and governance (ESG) refers to the three factors in measuring sustainability and the ethical impact of an investment. Every company we invest in affects, and is affected by the environment, functions within a wider, diverse society, and requires governance.
The Environmental factors focus on how a business responds to issues such as climate change, natural capital (e.g. water stress), pollution and waste, and environmental opportunities (e.g. renewable energy).
Social factors include human capital (e.g. health and safety), product liability (e.g. privacy and data security), stakeholder opposition (e.g. community relations) and social opportunities (e.g. access to communication and finance).
Governance criteria measures issues such as business ethics, tax transparency, accounting and executive salary policies.
The Harvard Law School Forum on Corporate Governance said in a recent publication that: There appears to be a link between ESG and financial performance.
A number of recent corporate failures and business scandals such as Steinhoff, Tongaat Hulett and EOH has again highlighted the importance of incorporating ESG into the investment process.
Most asset managers have set up research teams to gather information and analyse listed companies’ governance and ESG information, often with the help of third-party providers. They also attend shareholders’ meetings to ask questions about the way a company is managed. Some vote against proposals they deem to be in conflict with ESG factors. These ESG policies adopted by many asset managers act as an additional element of risk management as the financial risk of ignoring these factors is real.
All the evidence suggests that ESG is here to stay and some factors even received a boost from the repercussions of Covid-19.
Esmarie Strydom B.Com Investment Management(Hons)
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