ENVIRONMENT, SOCIAL AND GOVERNANCE (ESG) INVESTING: – HOW DID IT START? Before ESG Investment there was Corporate Social Investment (CSI). This concept was too narrow – it concentrated only on the “S” of ESG. The concept was expanded to include the Environment and Governance. The environment issue came to the fore via the BP oil spill in the Caribbean. The focus on Governance was driven by the Enron disaster. The consensus now is that ESG is too difficult to define. Furthermore, it focusses on the causes of the problem, not on the results achieved. The latest trend is to rather concentrate on the impact of the actions taken. This has led to the term ESG being replaced with the term Impact Investing.

WHAT IS ESG? Defining ESG is not simple. Why? Because the principles are often subjective, rather than objective, leaving the door wide open for disagreement and debate. Therefore, it is not possible to apply a tick-box approach to ESG. It is near impossible to apply a grading system. The reasons for this are the subjectivity of ESG principles. Data are supplied voluntarily by companies; data could be unverified, or analysts will have access to different data sources. The result is that different people will tick different boxes, resulting in different ESG scores. A Canadian critic said, “It’s great marketing. It’s a lot of sizzle, but no steak.”

ESG – ENVIRONMENTAL CONCERNS: Concerns regarding climate change and the depletion of resources have grown. As with all areas of ESG, the breadth of possible concerns is vast, for example, greenhouse gas emissions, biodiversity, waste management, and water management. Research has led investors to begin to screen investments in terms of their impact on the perceived factors of climate change. Fossil fuel reliant industries are less attractive. In every area of the debate from the depletion of resources to the future of industries dependent upon diminishing raw materials the question of the obsolescence of a company’s product or service is becoming central to the value ascribed to that company. The long-term view is becoming prevalent amongst investors.

ESG – SOCIAL CONCERNS: Diversity: There is a growing belief that the broader the pool of talent available to an employer, the greater the chance of finding the optimum person for the job. Human rights: In 2006 the US Courts of Appeals ruled that there was a case for bringing the area of a company’s social responsibilities squarely into the financial arena. This area of concern is widening: to include such considerations as the impact on local communities, the health and welfare of employees and a more thorough examination of a company’s supply chain.

CONSUMER PROTECTION: Until recently, caveat emptor (“buyer beware”) was the governing principle of commerce and trading. In recent times there has been an increased assumption that the consumer has a right to a degree of protection and the vast growth in damages litigation has meant that consumer protection is a central consideration for those seeking to limit a company’s risk and those examining a company’s credentials with an eye to investing. The collapse of the US subprime mortgage market initiated a growing movement against predatory lending, which has also become an important area of concern. Animal welfare: From the testing of products on animals to the welfare of animals bred for the food market, concern about the welfare of animals is becoming an important consideration for some investors.

ESG – GOVERNANCE CONCERNS: Corporate Governance covers the area of investigation into the rights and responsibilities of the management of a company and the various stakeholders in that company. Corporate Governance includes measuring the business ethics, anti-competitive practices, corruption, tax and accounting transparency for stakeholders. Management structure: Attention has been focused in recent years on the balance of power between the CEO and the Board of Directors and specifically the differences between the European model and the US model. In the US, studies have found that 80% of companies have a CEO who is also the Chairman of the Board, while in the UK and the European model it was found that 90% of the largest companies split the roles of CEO and Chairman.

SUMMARY: Hendrik du Toit, CEO of Ninety-One, says that ESG, or Impact Investing, has become a major driving force driving capital flows. Du Toit says South Africa’s ESG record is not good. Capital will flow to companies and countries that are responsible investors. Although ESG investing and impact Investing are gaining momentum, there is still a long way to go. Impact investing is an added cost for companies. It is easier and cheaper to promote yourself as green, rather than doing the hard work in allocating budgets and resources to Impact Investing. If there are no penalties from government, companies can get away with doing nothing. But we cannot do nothing. Something must be done to save our planet. Boney M was right when they sang, 40 years ago, in 1981, “We kill the world ’cause we don’t know what we are doing!”