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ESG – Social and Governance


Having briefly covered the Environmental aspect of ESG, this article will group the “Social” and “Governance” aspects together.

Numerous business drivers contribute to financial performance and investment returns, but they are not included in a company’s profit and loss statements. In the investment industry, these wider sets of social and governing value drivers are the second and third part of ESG.

The social and governing value drivers include a number of issues:

    • ► Acquiring the licenses to operate and compliance with local and national laws;
    • ► Following industry and sector codes of ethical behavior;
    • ► The attraction and retention of human resources and the intellectual capital needed to execute business strategies;
    • ► The ability to work in partnership with key stakeholders;
    • ► The track record of corporate and product/brand reputation;
    • ► The manner in which the company is governed by its board and managers;
    • ► Disclosure and transparency.

The list however, may not be complete for you. What of their participation in the community? Have they planted trees, supported recycling, or provided education resources? What is their percentage of qualified women or minorities on the board of directors? Are non-management employees given sufficient health insurance, holiday and sick leave?

Disclosure is made through Corporate Social Responsibility (CSR) reports. These reports however, are not standardised, particularly on the environmental and social aspects. Many companies have begun to produce a corporate sustainability report that highlights all the accomplishments they choose to share and obviously shows them in the best light, but may lack detailed data and targets, and certainly omits any negative data.

Facebook and Amazon both receive low marks in various ESG metrics — Amazon for the treatment of their workforce, which is maybe why Jeff Bezos wanted to draw the attention of the world to his purchase of 100,000 electric vehicles.

Facebook has data and content blocking issues, for which a majority consensus may never be satisfied.

ESG is still new and still subjective, and certain entities are still formulating what exactly is ESG. Since it is still a new field, how much faith can we have in ESG data? Various data providers have their own definition of ESG and their own methodology, which means that two providers can have a very different conclusion on the same stock.

So, the first step is making sure that everyone is on the same page. Everyone on your team must have the same understanding of “green”, “responsible”, “sustainability” or any other subject that is of importance to you in the investment process.

Since we tend to be evidence based in this investment process, this means we make decisions based on facts and research. If you are solely relying investment decision on certain metrics, such as woman representation on the board of directors, this could lead to questionable names in your portfolio from a global ESG standpoint.

In this case then, one has a choice between engagement or exclusion. You can exclude certain sectors altogether, or engage with certain companies and improve their problematic areas.

Are you an active or passive investor?

Your level of involvement directly affects your investment choices. The more research you do, the more likely you will find and invest in companies that meet or wish to attain your sustainability standards.

Relying on ESG investment agencies more than likely means investing a combination of high and low performers.