The old myth that investors need to sacrifice some returns if they want to consider environmental, social, and governance (ESG) factors in their investment strategy has rapidly gone out of fashion. There’s now plenty of evidence that shows how a company approaches these issues plays a significant role in long-term performance.
The COVID-19 pandemic, and its impact on businesses, has helped demonstrate the importance of considering more than a company’s balance sheet when it comes to investing your money.
That’s why the world’s leading investors are increasingly focused on environmental, social and governance factors when they weigh up which companies to invest in. ESG factors are a set of measures to determine how a company behaves and manages its impact on people and the planet.
The coronavirus pandemic hasn’t been the only recent event to have pushed investors towards a greater consideration of ESG factors. A price war between oil producing regions, combined with renewable energy becoming more affordable, has led to increased investment in green energy production.
The election of Joe Biden in the US marked a departure from the previous administration’s attitude to climate change, and under new administration the US has already re-joined the Paris Agreement and pledged new emissions targets for 2030. In addition, a number of commentators expect the US to introduce mandatory ESG reporting in the near future.1
Other countries have also indicated shifting attitudes towards the environment. The UK government’s Spring Budget included a number of initiatives aimed at promoting the ‘Green Economy’, including an infrastructure bank and grants to fund research and development in areas such as carbon capture and offshore windfarms.
At the same time, consumers are increasingly considering environmental and social factors in their decision-making processes. Companies seen to ‘give something back’ win more customers and, in turn, improve their bottom line.
All this suggests the global economy is creating a more investor-friendly landscape for socially and environmentally conscious companies.
While the environmental component of ESG tends to hog the headlines, the ‘G’ – Governance – is often overlooked when, in fact, it is just as important for investors.
A look over recent years shows a litany of companies suffering due to poor governance. The 2018 collapse of UK company Carillion, the largest ever trade liquidation in the UK, is perhaps an extreme example of what poor governance can lead to, but it helps shows the perils of chasing short-term growth at the expense of longer-term thinking and strong leadership.