Vista - ESG: The quiet revolution

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07/08/2019
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The fund management industry is going through a quiet revolution. In the past two years investment groups have begun to embrace environmental, social, governance (ESG) in a major way. And although it’s fair to say, this embrace is felt with less passion by some than others, it is nonetheless significant and long overdue. 
 

So what is ESG? 

ESG is perhaps best described as the impact a business has on the environment and society and the integrity of those managing it. The environmental impact can be looked at in two ways, from a negative perspective – and from a positive perspective, for example a manufacturer of energy efficient light bulbs has a positive impact by enabling a reduction in energy use and therefore lower CO2 emissions. An example of the societal impact would be safety in the work place or reducing the use of sugar in food products. A food business committed to reducing sugar levels in products would be viewed positively compared with one that isn’t changing. Corporate governance, of course, is about the honesty of a company; bribery and corruption being two high profile areas of concern.

What prompts these changes?

This quiet revolution is happening because of public demand and government legislation globally. Wherever you look the world is facing massive environmental and social challenges, most of which have largely been ignored by Governments, business and the population despite the growing warning signs and evidence from science. Climate change has been talked about for more than fifty years; global temperatures have been rising steadily and even if all CO2 emissions stopped today, temperatures will continue to rise due to the lag in the warming impact. The population of the planet 
is circa 8bn and forecast to rise to 10bn by 2050*; the current population is already putting a huge strain on the environment; a report from Cambridge University** highlights some of the areas under major stress – marine fish capture, ocean acidification, water usage, energy use and tropical forest loss.

Investment groups seem to fall into two groups where ESG is concerned. The first simply see it as another risk to be aware of when making decisions. The second see the need for change and that the global economy is evolving into one driven by sustainability issues, and they want to be a part of that change.

These investment groups are embedding ESG into all their thinking and decision making. A key aspect 
of embracing ESG is engagement. This is where shareholders become proactive and seek change, using their influence to improve the ESG aspects of a business. Many shareholders (large and small) 
feel it is their responsibility to do this, and if the shareholder is substantial their influence is that much greater. The industry is also coming together around issues; collaboration adds weight, and the use of outside expertise in areas such as healthcare and the environment only adds further to the impact of their research and demand for change – recently there has been collaborative engagement to address the high levels of sugar in foods. 

But, is this all financially viable?

Much of this may sound altruistic but there are solid financial reasons too – indeed it’s unlikely an investment group would engage if there wasn’t a financial gain involved. Businesses that are well managed, have a social mandate to operate and provide positive solutions will most likely be good investments. Indeed, it is increasing accepted that companies with good ESG records perform better than those that don’t. A study by Friede & Busch collated over 2,000 academic studies from the past 40 years which examined the relationship between ESG factors and financial performance. In over 90% of them ESG factors were found to have a positive or neutral impact on financial returns. Essentially, those with good ESG records perform better. 

But perhaps the biggest investment rational is that in addressing environmental and social challenges businesses are essentially achieving them through the delivery of critical services and products – and those that get it right stand a very good chance of providing investors with excellent long-term returns.

Source: * United Nations, August 2019 ** Rewiring the Economy (Cambridge University), November 2017

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