There was a considerable amount of attention when the United Nations set out its worldwide initiative aimed at positively influencing the actions of big business under the broad headings of Environmental, Social & Governance factors. ESG has since become the generic term used in capital markets and by investors to evaluate corporate behaviour and to determine the future financial performance of companies.
ESG is essentially very simple as a concept: the encouragement, by investors, of businesses and their leaders to ‘do the right thing’ in terms of the way they affect the world around them, their ethical standpoints and how they treat their workforce, customers and others with whom they deal.
Initiatives to encourage these sustainable and ethical values are not new, and in the UK the Stewardship Code was introduced in 2010. This was a set of basic principles by which institutional investors could put the boards and executives of companies in whom they invest to scrutiny with the aim of ensuring responsible governance. As a wider society, including the regulators of the investment world, hope to expand the global influence of businesses adopting ESG values, growth in ESG-led investing is increasing.
When we refer to ‘institutional investors’, for most of us this can be recognised as the professional fund managers who research and select the assets they hope will make money for us through acquiring large shareholdings in major global companies.
The money we as individual investors place into the collective funds the investment groups manage is, of course, the source of those shareholdings. The fund management groups’ influence is therefore clearly very significant in their engagement with companies in whom they invest and much more so than that of any individual investor who might hold just a few hundred shares.
As examples of the ‘unacceptable face’ of capitalism, we do not have to look too far back in the world’s news to find headlines that place the reputations of major businesses in a poor light; think of negative coverage that affected household brand names such as Facebook, VW, BP, Nissan, Ryanair, Tesco and Sports Direct. Last year, UK housebuilder Persimmon saw a major furore break out in relation to the bonus of £75m awarded to the Chief Executive.
On the flip side, the way in which ESG ‘thinking’ can have a positive effect is not simply limited to guiding corporations to avoid the ‘banana skins’ of reputational damage that can potentially destroy a company’s value. Instead, it is possible, as an example of a Corporate Bond investment by one of the UK’s largest investment groups, M&G, showed, for ESG conditions to be included in the terms of a recent re-financing deal.
This involved a large solar panel installation and M&G made the required finance available to the company, subject to around ten ESG factors including the requirement for the solar panels to be 100% recyclable; for the workers engaged in the installation to include a good percentage of local labour and for land on which the panels will stand to remain in agricultural, grazing usage at the same time and for the planting of wildflowers (and harvesting of the seeds from these flowers) to take place.
A further example of the positive impact relates to a large shareholding that M&G Investments have on behalf of investors in the UK’s largest packaging producer. While those with an ethical or socially responsible ‘green’ approach to the world might typically have thrust their face in their hands in despair, ESG values meant that M&G can impose a requirement that all of the company’s packaging is to be of a recyclable kind within three years. A significant influence in action is demonstrated here, with examples of how, as investors, our money should increasingly be ‘doing good things’ for the future of our world.