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What is ESG? – An Introduction – Part 1

ESG. You may have seen this term in the financial press or in our blogs. We recently posted the following blog, which was an update from Jupiter on Sustainable Investment Themes. https://www.pandbifa.co.uk/jupiter-the-acceleration-of-sustainable-investment-themes/

In our closing comments of this blog we said that we were currently developing our own ESG processes and would post more content on this shortly, so here goes.

What does ESG stand for?

ESG stands for Environmental, Social and Governance

But what is it?

Investopedia definition for ESG is;

‘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.’

ESG is more of a theme or a set of principles to follow rather than a single set principle.

Over the last few years, ESG has started being used more to describe how well a business is managed than to explain how sustainable its product or service is.

More recently, the mainstream press has been using ‘ESG’ as a catch-all term for investing with a ‘responsible’ or ‘ethical’ screen.

There are no official industry or regulatory standards for comparing these different approaches. However, with ESG now so important, some key definitions for certain factors have been accepted across the industry.

Breaking it down

(E)nvironmental

Investing with consideration for the environment. This includes working to reduce pollution and climate change, and to source sustainable raw materials using clean energy sources. The focus is on how a firm approaches environmental concerns, the ecological impact of its products and its carbon footprint.

(S)ocial

Investing with consideration for human rights, equality, diversity and data security. The focus is on how companies are incorporating these. It’s also about looking to see if each is actively investing/working towards a healthier and higher quality of life for staff and stakeholders.

(G)overnance

Investing with consideration for positive employment practices, business ethics and diversity. The focus is on how a company builds its management structure and works with all its different stakeholders. How does it approach investor and employee relations? Does the board work with transparency, honesty and integrity? Does this filter down to the rest of the company?

Summary

Renewed efforts to combat global warming, cutting emissions and reducing our carbon footprints has been highlighted by the Covid-19 Pandemic and this has further raised the profile of ESG.

‘Doing the right thing’, ‘socially responsible’ and ‘ethical investing’ has now hit the mainstream press and become one of our regulators, the FCA’s, focuses.

As a firm, we are committed to ensure that we review the ESG policies of all the companies we work with and recommend.

We started looking at ESG over a year ago and discuss this regularly in our weekly team meetings. We decided that we would make this one of our key projects this year to ensure we stay ahead of the game because we believe this is the right approach and we believe that the regulator will issue guidance for firms over the next few years to ensure ESG is incorporated within their propositions.

We can already say that we are starting to incorporate this within our firms service proposition and are committed to driving this forward even further.

This blog is aimed as a gentle introduction to ESG. A lot of the ESG processes within this industry are built upon the 10 ‘UN Global Compact Principles’.

Check back for Part 2 of this blog next week, in which we will look at these 10 principles and the screening process investment firms use to assess whether an investment is compatible with these principles or not.

Andrew Lloyd

06/07/2020

Data Source: Investopedia and Blackfinch Asset Management’s ESG Policy July 2020