The environment, social and corporate governance (ESG) narrative has snowballed over the past number of years as society becomes more focused on incorporating their values while investing and tackling issues such as climate change and inequality. As this interest has grown, institutions have increasingly incorporated ESG metrics into their reporting and due diligence. In theory, intangible assets such as ESG factors can increase a company’s value over time.  It’s best to look at the three components in isolation to better understand how you can become a more prudent investor.
Environmental factors include everything from climate change and carbon emissions to water scarcity concerns. The worry over climate change is too significant to ignore, and companies have addressed these concerns in the methods in which they conduct business. For instance, the oil and gas industry has faced incredible criticism over the past number of years. As a result, it has focused its energy by reporting methods to help reduce greenhouse gas emissions and play its part in preventing climate change. Exxon has recently acknowledged pollution issues by stating plans to spend $3 billion on carbon capture and storage.
Social factors encompass how companies manage their relationships with their employees, customers, and the community. Companies that focus on these factors will divert their efforts to improving everything from equality and diversity amongst workers to community giving campaigns. The #MeToo and Black Lives Matter movements are recent real-world examples of the increased importance of social matters and their impact. In fact, a 2015 research review demonstrated positive correlations between the management of workplace relationships and a company’s financial performance.
The governance factor tends to get overlooked amongst the prevalent ‘E’ & ‘S’ factors, although it still plays a critical role in the investment decision-making process. Governance starts with the leadership of the company and how decisions are being made at the top. Specific components include everything from a company’s core values and purpose to risk management protocols. Lack of governance can have severe consequences on the future of a company. There have been various cases in which a lack of corporate governance has led to the detriment of investors and stakeholders, a notable case being the Enron scandal in the early 2000’s.
ESG has become an important aspect to consider when investing responsibly. It shouldn’t be used in pure isolation to arrive at a decision but rather as a complement to other research and due diligence you perform before making an informed investment. There are numerous resources available such as stock screeners and indexes, that can provide a clear picture of how focused a company is on ESG. With the increase in awareness, you can be sure this concept isn’t going away anytime soon. If you’re interested in learning more about Kinsted’s investment platform, contact one of our Wealth Counsellors today.