To the legion of acronyms that increasingly define working life (ROI, WFH, CSR, HR…) comes a relatively new addition: ESG. Environmental, social and corporate governance is enjoying a moment in the sun – or it was before the coronavirus pandemic swept most other considerations off the agenda.
But ESG remains key to how companies conduct their business, and may become even more important in the wake of Covid-19. In a webinar (members only) hosted last year by Michael Moore, the director-general of the British Private Equity and Venture Capital Association (BVCA), a discussion about how to address ESG after the pandemic identified issues ranging from the Black Lives Matter movement (BLM) to reducing risk in the international supply chain.
Moore drew a line between George Floyd’s death at the hands of US police in Minneapolis in May 2020, the subsequent BLM protests in the UK and the question of whether businesses will renew their focus on diversity and inclusion after Covid-19, while George Potts, investment director at the private equity house NorthEdge and chair of the BVCA’s responsible investment advisory group, cited Brexit and diplomatic ructions with China as “here-and-now impacts that really bring an ESG mindset to life”.
What is ESG – and can my company afford it?
The profile of all three components of ESG has grown in recent years. Given the increased global awareness of the climate crisis, environmental factors are particularly pertinent, and established activists such as Greenpeace and Extinction Rebellion have been joined by Climate Action 100+, an investor-led initiative that is working with the world’s largest greenhouse-gas emitters to drive a transition to cleaner energy. In a corporate context, all firms should consider not only the resources they use, but also the consequences, such as carbon emissions.
Social factors revolve around your company’s relationships and reputation (one example is making an effort to work with people whose values mirror your own), and how your business functions in its local communities. Taking care of your employees and focusing on diversity and inclusion are two strands of this progressive approach that have received widespread coverage since the pandemic began.
Finally, governance refers to the internal practices and procedures to which your employees adhere. Maintaining the highest standards in this area spans everything from compliance with the law to providing accurate and transparent accounts, from effective decision-making to giving key stakeholders a voice.
Of course, the hard reality is that businesses and investors – particularly with the UK having experienced its worst recession since records began – need to look at the bottom line. Investment with an ESG slant has undergone a “meteoric rise”, according to McKinsey, which states that global sustainable investment has increased 68% since 2014 to reach $30tn. The management consultancy argues that responsible investment can boost top-line growth, reduce costs, improve productivity and enhance returns – and it concludes that, with governments and consumers now paying more attention to businesses’ broader impact, this change is “much more than a fad”.
Household names are leading the way
These factors may help to explain why major companies are increasingly keen to prove that they are thinking and working responsibly. Following pressure from investors, HSBC has tabled a shareholder vote, due to take place in May, on plans to phase out coal financing by 2040. BlackRock, which manages more than £5.3tn of assets and has long been criticised by environmental campaigners, last year announced a shift in its investment strategy that includes reducing its exposure to fossil-fuel firms.
BlackRock’s boss, Larry Fink, argued that the move was a response to the imminent “fundamental reshaping of finance” caused by the climate crisis, and the investment giant says that it has since voted 55 times against directors at 49 firms for failing to make progress on this issue. Meanwhile, Rio Tinto’s chief executive resigned after the company blew up culturally significant, 46,000-year-old rock shelters in Western Australia, prompting protests by investors and indigenous groups.
Bigger companies are starting to join smaller ones in the list of businesses designated as B Corps – a certification that assesses firms in five areas (governance, community, environment, workers and customers). Organisations that have achieved the status include Bancolombia (the third largest bank in Latin America, with assets topping $55bn), the US ice-cream maker Ben & Jerry’s and numerous divisions of the French food giant Danone.
Some high-profile individuals are demanding change – Mark Carney, formerly the governor of the Bank of England and now the United Nations’ special envoy for climate action and finance, is working with the US digital payments company Stripe to help businesses fund new carbon-removal technologies – but there is movement from governments and regulatory bodies, too.
In the UK, the Financial Conduct Authority has published proposals that would force most of the companies listed on the FTSE index to disclose any financial risks to which the climate crisis leaves them exposed, while the prime minister, Boris Johnson, announced in December 2020 that the UK will no longer provide financial support for fossil-fuel projects overseas.
How to be a responsible investor – and how you will gain
So, how can we all play our part? Since it was founded in 2011, BOOST&Co has nurtured a strong company culture that seeks to build awareness among staff of the firm’s environmental impact, promote diversity and inclusion (unusually for the financial sector, 50% of our employees are female) and contribute to local communities (for example, working with the Cape Town-based non-profit organisation A2Z Helping Hands to distribute food parcels on Nelson Mandela Day last July).
Now, the leading alternative lender has signed up to the United Nations’ Principles for Responsible Investment, an approach to managing assets whereby investors pledge to consider ESG when deciding what to invest in and while fulfilling their role as owners and creditors. The six principles, which aim to develop a more sustainable global financial system, include incorporating ESG issues in your company’s decision-making processes, seeking disclosure on these matters by any businesses in which you invest and reporting on progress.
The aim is not to limit any potential business activities, and participating in the scheme is not onerous, says Edd Hatfield, BOOST&Co’s chief financial officer. “The only change for us has been to formalise our processes for reporting the relevant data,” he says. “This shouldn’t be about sacrificing returns; it should be about enhancing the potential for returns.”
The principles sit perfectly with companies that already take ESG into account. “It ingrains a doctrine in BOOST&Co that was already 99% there,” Hatfield says. “We’ve never invested in anything that I would consider to be vaguely against the spirit of PRI – in fact, we’ve declined opportunities to invest in perfectly legitimate industries that we didn’t feel, ethically, were right for us – but the principles do help us to define our approach, as well as keeping us up to date.”
Showing that you appreciate these issues is increasingly important to investors, too. “When we do any type of fundraising, we’re always asked: ‘Are you signed up to the UN’s PRI scheme?’ If you’re not, a lot of investors will throw your application in the bin, and that’s exactly what the initiative is trying to achieve,” Hatfield says. “If everyone signs up to it and everyone agrees to it, then the world’s a better place.”
Public opinion changes quickly – don’t get left behind
The scheme also provides a valuable benchmark for businesses that want to keep up with cultural change. Hatfield notes that topics such as modern slavery, child labour, diversity and executive pay have become much more widely discussed in the past decade, along with environmental concerns (in September 2019, the UN initiative published a statement by 230 institutional investors calling on companies to tackle deforestation, following severe forest fires in the Amazon).
“It’s about keeping abreast of changing times, changing moods and changing public opinion,” he says. “What would previously have fallen under the umbrella of responsible investment changes almost daily, so you’ve got to keep up to speed, and these principles help us with that.”
The initiative now has more than 3,000 signatories, representing more than $100tn of assets under management – the sign of a significant international movement that counts France’s president, Emmanuel Macron, among its supporters. “Thousands of companies around the world are signing up, and it’s being taken seriously at the highest levels,” Hatfield says. “It’s part of the UN’s agenda and it’s something that we absolutely have to be part of.”
Proof, if any were needed, that responsible investment has both moral and material benefits: it can help your business to enhance its returns and better manage risks, as well as being the right thing to do.
Find out more about the UN’s Principles for Responsible Investment here