There’s an area of investment called ESG . . . made up of the three words Environmental, Social and Governance.
Society is not standing up and taking a stance on where their money is being used/invested and disinvesting from those areas that do not match their values.
For many years now, it seems the large corporates have no interest in ‘customer care’ other than a tick box on their website or brochure. Having a captive audience has let standards slip to such an extent that you feel you are actually not wanted, and where accountability is non-existent.
Moreover, the unhealthy control certain corporations have around the world has not gone unnoticed. That control influences elections and, through blatant lobbying, also influences policy.
Society is taking its stance in many ways.
Through taking action with their investments, the investor can use that power to pressure liquidity and company share values, while focussing on aligning their values with the companies they believe are doing what is right for society and the planet.
Investors join together and invest into a fund which decides who or what matches the key criteria, and with that joint power comes significant financial clout. Rewarding a good company by investing into them because they fit the criteria sets the message and encourages others to do the same, effectively creating that positive feedback loop. The reverse is also true of those with poor policies.
Environmental covers matters like the use of natural resources such as water stress, biodiversity and land use, as well as how raw materials are sourced. It also looks at climate change in terms of carbon footprint/emissions. Other obvious headings are pollution and waste, as well as the environmental opportunities in clean technology, green building and renewable energy.
Social covers a range of headings such as how a company is dealing with its health and safety, managing/paying its staff and their development; product safety, including its quality and chemical safety, alongside privacy and security of data; social opportunities such as health and nutrition, healthcare, finance and communications are all key topics.
Governance covers the ownership and control of companies, how executives are paid, how diverse the board, is as well as its accounting practices/tax transparency. Business behaviour such as its ethics, instability/corruption, anti-competitive practices are also screened.
Many of the above are clear and tangible and can be easily verified so investors can be comfortable their capital is where it should be.
It is well proven that companies with high ESG scores have lower risks, better financial returns and in difficult times, ie a crisis, are more resilient. It stands to reason that most investors would also find that a safer form of investing.
The MSCI showed that such companies’ profitability was higher compared to lower ESG scoring companies, which also resulted in higher dividend payments.
Similarly the volatility (risk) of high ESG companies is also lower (less shocks).
Companies with high ESG scores are proven to be more likely to be able to refinance competitively and also that their insurances would equally be easier on their pocket.
As wealth has been created over the last century there is an expected shift of $30 trillion from the older generation to the younger who are aged 25 to 40. This generation thinks very differently about how money should/could be used and is the shape of the future of investing.
‘Millennials’, as they have been tagged, are twice as likely to invest into funds that solve social or environmental problems, and 84 per cent of millennials interviewed stated they were interested in investing sustainably.
Two thirds of millennials believe investing in such a way expresses social, political and environmental value, whereas just over a third of baby boomers believe this to be the case, further signalling the future shift in investment attitudes.
Without a shadow of a doubt, companies with high ESG scores will attract like-minded and better qualified staff. Retention of the best staff is paramount to supporting profitability, all of which contributes to that positive feedback loop.
