This article was provided by and expresses the views of Nancy Bikson, Managing Director at Chapel & York, a partner firm of the Beacon Gainer private client advisory services group.
ESG Standards have been developed to determine how socially conscious a company’s operations are and help investors determine whether they want to invest in that company.
It is important because as an increasing number of investors use ESG standards and measurements in their investment decisions, anyone working with investors – those in the wealth advice, family office and related advisor roles needs to be cognisant of and engage with ESG measurements.
Environmental means what is says – how a company acts as a steward of the natural world in which it works.
Social means how a company manages its relations with its various external stakeholders – employees, customers, suppliers, and the wider community within which it works.
Governance deals with a company’s internal activities particularly those larger companies with external shareholders and looks at leadership, internal controls, pay and shareholder controls.
It is important to understand ESG issues because these are a useful method for investors to evaluate companies and is becoming even more popular as young, Next Gen, investors look to place their capital. In fact latest figures show that investment in ESG companies is booming whilst investment in traditional companies who haven’t joined the bandwagon is lagging behind.
Impact investing, sustainable investing or social investing are all names for the same result – ensuring that an investor’s financial investment meets his or her social, moral and life goals. ESG is an objective method of evaluating companies and in fact many funds, firms and robo-advisors have products which employ ESG criteria. Whilst ESG is often seen as a purely socially acceptable and appropriate way to evaluate a company, in fact it can also help determine whether a company is robust enough to withstand many of the social and business requirements placed upon it in today’s world.
Environmental, social and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments.
Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
Environmental criteria may include how a company uses energy, deals with its waste, conserves natural resources even how it treats animals in fields where that is relevant. The criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks.
Social criteria looks at the company’s business relationships. What does its supply chain look like? How is each step and each company evaluated to ensure that they have the same values as the original company? Does the company have a CSR policy? Does it work with the local community? Do its employees? How does a company value its employees, does it provide measurable support to them in addition to the required health and safety? In other words does the company have a structure and management which cares about the world around it and its employees?
Governance is probably the most traditional of all the ESG requirements. Investors have always looked to see how a company is managed; are processes transparent; how involved are shareholders in governance issues. Many younger investors prefer companies where their involvement is not just passive – whilst they want their money to work they also want involvement in the strategy, governance and output of the company.
Like many other objective measurements, ESG can be crucially important in evaluating a company; it can also be a measurement which excludes companies who are unique, interesting companies with a lot to give investors and the world but who because of their nature cannot or do not fit within the objective ESG measurement criteria. Or it can be just the opposite, favouring start-ups with a specific ESG focus.