ESG…
ANOTHER BUZZ WORD TO TRY TO REMEMBER…!
‘The Rise of Responsible Investing!’
The title of this piece is ‘ESG…another buzzword to try and remember…!’ That’s wrong to start with! A buzzword, as defined by Oxford Languages, publisher of the Oxford English Dictionary, is a word or phrase, often an item of jargon, that is fashionable at a particular time or in a particular context.’ Well ESG is neither! It is an acronym…but I’ll still stick with it being a buzzword because I have heard it mentioned, cited, quoted, voiced, cautioned, warned, especially warned, lots of warning and lots and lots of webinars, seminars, paper, position statements, etc…etc…etc…!
This piece is not going to fit into any of these cleanly… but it is a first look at the detail, something we will all seemingly have to deal with…and I should warn you, there will be more acronyms coming!
…ESG ISSUES ARE RELEVANT FOR FINANCIAL VALUATIONS.
This is the supposed ‘Rise of Responsible Investing’… as if we didn’t need to do that in the first place! ESG stands for Environmental, Social, Governance (…or derivations of those words). It was first used in a 2005 study called ‘Who Cares Wins.’ and is based on the SRI movement (Socially Responsible Investment) that has been around much, much longer. The difference is SRI used ethical & moral factors to mostly negatively screen investments, whereas ESG investing is based on factors that have financial relevance. It all started when former UN Secretary General Kofi Annan wrote to over 50 of the world’s major financial institutions, asking for a joint initiative under the UN Global Compact and supported by the IFC & the Swiss Government. This produced ‘Who Cares Wins’, authored by Ivo Knoepfel. In essence, it stated embedding ESG factors makes good business sense, sustainable markets & better outcomes for societies. At the same time, the UNEP/ FI produce what was known as the ‘Freshfield Report’. It showed ESG how issues were relevant for financial valuations…i.e. non-financial factors used as criteria to compare a company’s impact on the environment, contribution to social goals & the quality of governance…with other firms! These two reports helped start the PRI – Principles for Responsible Investment at the NYSE in 2006 and the Sustainable Stock Exchange Initiative (SSEI) in 2007. Today the UN backed PRI has over 1600 members representing USD 70 Trillion in AUM
Taking a step back. In theory, companies who score highly on ESG criteria will perform better over the longer term and investors would therefore prefer to buy their debt or equity compared to ones that don’t. So…what measures a company’s ESG level? Some have put forward the idea of a scoring ladder with a threshold system, similar to ones used by rating agencies but with Laggard, Average and Leader instead of the AAA’s, BBB+, etc. To get these ratings, the companies rated will be measured on thousands of points on tens of key ESG factors. Additionally, some of this is happening…right now!
10 | ADMISI - The Ghost In The Machine | Q1 Edition 2021
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