What is ESG and why is it so valuable to an organization and investors?
I just watched a video clip from Fox News where Tucker Carlson was telling his uninformed audience that ESG will cause people to lose their guns. He went on to further state that, “The country of Sri Lanka’s government collapsed due to ESG and that the country of Germany no longer had bright street lights at night…if we continue to bring ESG to the USA that this is what will happen”. This is misinformation at the highest level, and he is either willfully ignorant, or confused. I would like to clarify what ESG is and is not.
ESG is not about taking your guns, it is not something that will collapse the US government, and it surely will not cause for a country to lessen safety by using dimmer lights. The safety and well-being of a populace is of utmost importance to people that care about ESG. So what is ESG?
ESG stands for Environmental, Social, and Governance. If it was up to me, I would add a C for Climate. ESG criteria is a set of standards for a company’s behavior used by conscious investors to screen potential investments. ESG came about is investors were looking for a means to gauge a company’s commitment to sustainability issues and being socially responsible stewards of the planet. The environmental criteria looks at how companies safeguard the environment; measure their GHG output; and any policies that effect climate change, positively or negatively.
Social criteria looks at how a company manages relationships with employees, encourages diversity in the workplace, and deals with customers and shareholders. Governance criteria deals with a company’s leadership, adherence to local, state, federal, and international law, audits, executive pay, internal controls, and shareholder rights.
ESG came about due to investors wanting to know if companies that they are interested in investing their hard-earned money in are being responsible. This is important because a company that is not being responsible can end up having situations where their value tanks. Examples of this could be an environmental disaster, like a company not getting rid if waste appropriately; companies that are not fair in hiring practices; or companies that lie to their shareholders about their practices. An ESG report gives an investor confidence that companies they have invested in are doing right by the environment and society and also complying with the law.
It is not only individual investors that benefit from ESG reports, large institutional investors such as public pension funds also use ESG criteria to make informed decisions. According to the US SIF Foundation, investors held $17.1 Trillion in assets in 2019, up from $12 Trillion in 2017. A difference of over $5 Trillion in just two years, and this number continues to grow. This has resulted in over 90% of publicly traded companies to give voluntary ESG Reports as of this writing. This number continues to grow.
ESG Investing can also be referred to as sustainable investing, responsible investing, impact investing, or socially responsible investing (SRI). Investors look at a broad range of behaviors and policies to assess a company’s commitment to excellence.
Corporate Climate Policy looks at a company’s energy use, policies to mitigate pollution, waste, and natural resource conservation. This helps a company to see what their environmental risks are which in turn allows for them to create policies to lessen the risks. Considerations may affect direct GHG Emissions, management of toxic wase, and compliance with environmental regulations.
Social criteria look at a company’s relationship with stakeholders such as employees, and their local communities. Do company’s hold the ESG standards to their suppliers? Are there safeguards to qualify suppliers? Does the company encourage extracurricular activities by employees to do volunteer work? Does a company donate money to their local community or to programs that benefit the local community or environment?
Does a company care about workplace safety? Are their programs to help their employees with issues such as mental health? Do they encourage healthier lifestyles, or does the company engage in taking unethical advantage of its employees?
ESG governance standards ensures that a company uses accurate and transparent accounting methods, has high integrity and diversity in selecting and obtaining leadership roles within organizations, and is accountable to shareholders.
ESG investors want to make sure that companies are legally compliant, not engaged in illegal activities like dumping of pollutants in water sources for example. Als companies should not be involved in conflicts of interest and using money to influence politicians to obtain preferential treatment.
Investment firms that utilize ESG often set their own priorities. Some might look to see if a company is poise for long-term success, while others might preclude some investments in other industries. These industries could be in armaments, private prisons, nuclear and coal power, or rock mining. Investors might also avoid companies that do not adhere to human rights either in the USA or abroad, animal rights, environmental concerns, or product safety.
Every investor has a right to decide what criteria they use when investing their money. If a company does not adhere to their values, they have the right to know this. That is where ESG Reporting comes in.
PSCG works with companies in ESG Strategies and Reporting that will give their current and potential shareholders an overview into their sustainability policies, procedures, and programs. This allows for them to give shareholders an educated look into their company to give the shareholders confidence that their investments align with their values, increasing the overall valu of a company at the same time.
If you would like to know more about ESG and how you can start in your ESG journey, please contact PSCG and we would be happy to consult you.