Not a week goes by without an article or event discussing Environmental, Social and Governance (ESG) and last week was no different as I attended a seminar hosted by Clifford Chance.
ESG is just another form of risk and as treasurers managing risk, it’s an area that treasurers can take a lead – bringing together a variety of risks across their organisation.
Research shows that ESG focused businesses have a Return on Equity that is 5% higher than peers, experienced fewer swings in earnings volatility and had a better chance of a credit rating upgrade. In addition, investment managers are aware that millennials and other activist shareholders expect more from their investments and are taking further steps to provide suitable products for this small but growing community of savers.
There was much discussion about how the ESG agenda has evolved from being a niche philanthropic endeavour to a broader responsible investing activity that has a wider reach of engaged stakeholders. As interest has grown, it has moved from a purely compliance-based process to one now firmly rooted in the wider risk management framework. Insurers, asset managers and regulators are all applying an ESG lens and considering at a fundamental level, how organisations are run. Key risks they want to understand include:
One of the new terms I came across was Impact Investing. This is sometimes confused with ESG but essentially the difference is that Impact Investing focuses on investing in companies with products and services that can generate measurable and beneficial social or environmental impact alongside financial return whereas ESG focuses on using environmental, social and governance factors in an entity's operations with a view to enhancing risk management. ESG considers the operations of the company, while impact investing focuses on the products and services the company is producing. The company still has to have good ESG. It still has to have sound environmental, social and governance practices in its operations. But to qualify itself as an “impact company”, it has to be selling solutions, products, and services that help in the world and achieve its sustainability goals.
ESG has a wide range of stakeholders and it is becoming increasingly clear that they are looking beyond the environmental agenda towards a more holistic view where there is talk about the health of the share price – a concept that includes non-balance sheet metrics.
ESG typically focuses around Environmental and it’s often the area that gets most media coverage. The event I attended was moderated by a partner specialising in human rights which I at first thought odd but as I listened more to the “S” in Social it made more sense. Social can be described as:
Social extends beyond an organisation to across its entire supply chain. As this area takes on greater focus, organisations and risk managers will need to do more to understand and monitor the risks across their overall supply chain.
As the ESG agenda has grown in both importance and breadth, there was a recognition that many organisations have lots of positive activity going. However, the challenge is how to bring them together under a broad framework that can be easily articulated to shareholders, staff, communities and regulators. KPMG has produced a useful guide including the extract below:
A few things to watch out for
There were a couple of predictions about climate change that suggested a need to take the issue more seriously: