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What is ESG? – An Introduction – Part 2

Last week, we posted part 1 of our 3-part introduction to ESG blog series. If you haven’t read this already, here’s the link: https://www.pandbifa.co.uk/what-is-esg-an-introduction-part-1/

In part 1, we explained what ESG is. Here, in part 2, we dig a little deeper

As we noted last week, a lot of the ESG processes within this industry are built upon the 10 ‘UN Global Compact Principles’.

The United Nations Global Compact is the world’s largest corporate sustainability initiative.

This is a call to companies to align strategies and operations with universal principles on human rights, labour, environment and anti-corruption, and take actions that advance societal goals.

Their mission:

‘At the UN Global Compact, we aim to mobilize a global movement of sustainable companies and stakeholders to create the world we want. That’s our vision.’

To make this happen, the UN Global Compact supports companies to:

  1. Do business responsibly by aligning their strategies and operations with 10 Principles on human rights, labour, environment and anti-corruption; and
  2. Take strategic actions to advance broader societal goals, such as the UN Sustainable Development Goals, with an emphasis on collaboration and innovation.

The 10 UN Global Compact Principles:

Human Rights

Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; and

Principle 2: make sure that they are not complicit in human rights abuses.

Labour

Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining;

Principle 4: the elimination of all forms of forced and compulsory labour;

Principle 5: the effective abolition of child labour; and

Principle 6: the elimination of discrimination in respect of employment and occupation.

Environment

Principle 7: Businesses should support a precautionary approach to environmental challenges;

Principle 8: undertake initiatives to promote greater environmental responsibility; and

Principle 9: encourage the development and diffusion of environmentally friendly technologies.

Anti-Corruption

Principle 10:
Businesses should work against corruption in all its forms, including extortion and bribery.


The Screening Process

A key strategy of sustainable and responsible investing is incorporating environmental, social and corporate governance (ESG) criteria into investment analysis and portfolio construction across a range of asset classes.

The 10 UN Global Compact Principles are the foundation for investment firms who wish to bring ESG on board within their investments.

Firms use 2 methods of screening whether the companies they choose invest in are considered compatible with the 10 principles.

Positive Screening

Investment in sectors, companies or projects selected for positive ESG performance in comparison to industry peers.

This involves selecting firms that show examples of environmentally friendly and socially responsible business practices. This also includes avoiding companies that do not meet certain ESG performance thresholds.

Negative Screening

The exclusion from a fund or certain sectors or companies involved in activities deemed unacceptable or controversial (e.g. tobacco, arms, gambling etc).

This involves avoiding companies that create negative impacts considered incompatible with the UN Global Compact Principles.

Summary

Positive Screening is our preferred method when we are looking at how firms screen, as this shows a more active approach into looking into firms that are committed to making a difference, rather than just excluding the ones that don’t. However, most companies use a combination of both as in reality, as the UN Global Compact was only started in 2015, most investment firms/sectors still have a long way to go towards meeting their ESG goals, but it’s good to see that the industry is starting to adapt.

Check back for Part 3 of this blog series next week, in which we will look at what we at People and Business are doing as a firm to make sure that we are moving in the right direction by selecting firms with good ESG processes.

Andrew Lloyd

13/07/2020

Data Source: unglobalcompact.org, ussif.org and Blackfinch Asset Management’s ESG Policy July 2020