When is the right time to consider implementing an Environmental, Social and Governance (ESG) framework? Today and for newly emerging funds, it is more important than ever to consider ESG policy on day one.
Paying attention to ESG concerns helps your bottom line – 63% of companies saw positive findings on returns after ESG implementation
Good corporate “citizenship” and good “governance” qualities account for nearly 30% of corporate reputation
70%+ of consumers surveyed in multiple industries, said they would pay a higher price for a green product if it met the same performance standards
Investors who control the world’s investable assets consider ESG policies as essential as compliance and cybersecurity. The double-digit Year-Over-Year (YOY) growth reported by UN Principle for Responsible Investment (PRI) supports this assertion. For fiscal year-end 2021, PRI reported $121 trillion of AUM, a 26% YOY increase in signatories who use ESG in their investment process. And who are PRI signatories? They are every relevant institutional investor worldwide.
Before explaining why today, let’s look at what is meant by ESG. First, an ESG policy does not make the fund an ESG fund. For most managers, an ESG policy means the fund uses ESG data to mitigate downside risk and identify long-term opportunities. The assertion is that well-run companies, over time, will outperform poorly run companies. Investment analysts incorporate non-financial ESG data alongside a traditional financial analysis in their buy-sell recommendations. And post-investment, continue to engage companies on ESG matters, encouraging them to be better. This form of ESG, known as ESG Integration, is used by the vast majority of funds with an ESG policy.
Attributes of a Well-Run Company:
- Respectful of the environment
- Value their employees
- Promote diversity
- Act as good corporate citizens
- Maintain strong corporate governance
Examples of ESG Integration Include:
- A company with an aggressive growth plan needs to implement a robust employee recruitment, retention and training strategy to support its growth. By considering diversity, childcare and hybrid work arrangements, the company can make itself an employer of choice and thus grow the workforce to support its top line. If ESG integration is ignored, this company could face excessive turnover or, worse, a decrease in customer satisfaction.
- Another example is a company where energy costs are material. (e.g., real estate). By considering ways to reduce energy consumption, the company can increase bottom-line results. And by considering renewable energy sources, they may be able to lower energy costs while avoiding price spikes associated with fossil fuels.
Every company has ESG risks and opportunities. The ESG policy dictates how these ESG factors document, identify and incorporate into the investment process.
So why should investment funds implement an ESG policy today? The reasons are simple — having a policy on day one shows your awareness of the importance of ESG, plus the additional benefit of the ease of implementing an ESG policy at the beginning rather than waiting until investors demand one.
An ESG Integration policy supplements the investment process to help managers identify sources of risk and long-term opportunities. This policy is appropriate for managers of all sizes and strategies, so the real question is, why wouldn’t a manager implement an ESG policy today?