Environment, Social and Governance (ESG) investing refers to the framework where investors embrace a holistic and sustainable approach rather than just pure profit motives, as has historically been the case.
Over the past decade, investors have increasingly recognised that ESG information about companies is essential to understanding the company's purpose. Asset managers have factored ESG principles into their investment models.
The increasing global focus on sustainability has made ESG a key factor in how decision making is framed across various organisations. Governance, for example, focuses on how well run a company is while making sure that the balance sheet reflects accuracy in line with best practice.
Before the emergence of ESG as one of the approaches to investing, the environment and governance considerations, individually have historically been more prominent. Corporate governance made progress in the last decade owing to investor expectations of public companies’ boards. The demand for a strong board quality, their effectiveness, and accountability to shareholders will continue to accelerate across global markets.
Environmental impact has been a factor for years. It was brought under the microscope during the Paris Agreement, which was adopted by nearly every nation in 2015 to address climate change and its negative impacts. According to National Geographic, Humans have pumped enough carbon dioxide into the atmosphere over the past 150 years to raise its levels higher than they have been for hundreds of thousands of years. This is through pollutants such as cars, planes, power plants, and other human activities that involve the burning of fossil fuels such as gasoline and natural gases.
In a recent study by Deloitte Insights, regulators have been demanding more depth and transparency from public firms regarding their environmental impact. In fact, nearly four in 10 survey company respondents said they focus on societal issues because it’s a priority for external stakeholders. Industrialisation, while important for economic growth and social development can also be harmful to the environment. Air emissions, effluents, solid waste, land and coastal pollution and hazardous materials have been contributors to pollution and in turn climate change.
At the start of 2020, there started a new shift in focus as social matters were elevated in the discourse alongside the rise of the Covid-19 pandemic. Industries and companies have been faced with this social issue which has affected everyone in the community. Covid-19 has brought into focus how well companies treat the workforce, suppliers, clients and the society around them.
While social factors had previously been overshadowed by governance and environment, the current situation will also see a shift in reporting period adjustments. Investors are more likely inclined to adapt their business models to reflect the realities of the ongoing situation even as they continue assessing companies' survival prospects. Amidst all of this, organisations need to ensure regular communications with their stakeholders.
To arrive at investment decisions, investors consider both qualitative and quantitative datasets. The qualitative data at the moment is hard to evaluate. However, debt covenants and liquidity of businesses are coming into focus. Through it all, several companies will require governance support. Having a predefined company view on the impact of Covid-19 for the company’s sustainability will be crucial to surviving the pandemic and should transparently be shared with shareholders. Organisations may not be able to rely on the traditional periods of reporting, however, they may offer updates regularly. Companies will also need to make use of their investor relations tools and strategies to ensure investors remain invested in their stock for the long-term.
There is a gap in vocalising what measures companies have taken towards Covid-19. As the world moves to the next phase which substantially looks like the long-term phase of the pandemic, the lessons learnt can be of great value to businesses. There is a need for increased scenario planning as well as forecasting potential impacts.
In the past companies have looked at the economic, environmental and social impact in the short-term profitability of the business. This period has, however, put into perspective the need to strategically include ESG in long-term company plans. Case in point, investors would appreciate information on how the company is managing Covid-19 impact.