If you think ESG is hogwash, read this

Apr 07, 2022
Jon Hale, head of sustainability research for the Americas at Morningstar, shows how precedents are being set.

Russia's invasion of Ukraine has provoked a lot of discussion about sustainable investing, highlighting the growing influence of sustainability concepts on investing in general.

For the most part, the discussion has centered around values-based exclusions, but there is much more to sustainable investing than that.

Understand what ESG really is.

While ESG, the acronym for Environment, Social and Governance, is often used as the umbrella term for what we call sustainable investing, it has a narrower meaning. It generally refers to the assessment of material environmental, social, and corporate governance issues in a company.

ESG metrics and ratings are used by investment analysts to evaluate companies more holistically, rather than simply relying on financials. The idea that ESG concerns are financially material and therefore can impact a company’s bottom line is an essential element of sustainable investing and a key reason for its rapid growth.

What we refer to ESG funds tend to be those in which ESG analysis plays a central role. Most asset managers today have incorporated ESG analysis to some degree into their investment process.

Arms and ESG: Let's not U-turn

The widespread use of ESG assessments is significant.

Investors have successfully made the case to corporate leadership that it should address ESG issues that are material to its business, with the central message being, in the words of Andrew Winston, "that managing climate and other ESG issues is core to business value." Beyond that, Winston notes, many companies are taking "bolder, systemic approaches that create a net positive impact on the world."

ESG has emboldened companies to listen to their stakeholders.

ESG has emboldened companies to listen to their stakeholders and has underscored their need to carefully safeguard their reputations in an age of heightened transparency driven by social media.

At American fast-food restaurant chain Jack In the Box, a shareholder proposal asking the company to adopt a sustainable-packaging policy passed with an astounding 95% of the vote. Opposed by management, it is believed to be the highest level of support ever for a plastics/packaging-related proposal. Following the vote, the company informed Green Century Capital Management, the sustainability-focused asset manager that sponsored the resolution, that it intends to address the concerns expressed by shareholders.

At Walt Disney, nearly 60% of shares were voted in favour of a shareholder proposal for the company to report on pay gaps across race and gender. The proposal, filed by another sustainability-focused asset manager, Arjuna Capital, comes in light of allegations of gender pay discrimination at the company. The SEC denied a management request to exclude the proposal from the ballot given ongoing class-action litigation on the subject.

Sustainable Investing helps achieve Stakeholder Capitalism

ESG has forced companies to take a stance.

Companies are being responsible actors on the public stage when conditions warrant it, rather than shying away from taking stands.

Hundreds of companies have announced their withdrawal from Russia, Yale puts the number at over 600. It's not all because of ESG, but because other stakeholders – customers, employees, and business partners – are clamouring for companies to leave Russia. What's striking is the willingness of so many companies to move forward proactively because they know their stakeholders are aligned in wanting them to do so.

Russia's invasion of Ukraine underscores the urgency of shifting to renewable energy. It's not only about climate change but also more clearly than ever also about ending our dependence on Russia for oil and gas, especially in Europe, because that dependence essentially is financing the invasion, not to mention other autocratic petrostates.

In the coming months and years, you can bet that sustainability-focused investors will be engaging with companies doing business in Russia and other autocratic regimes about the human rights implications and regime support of their involvement.

Sustainability-focused investors have contributed to the corporate exodus from Russia, and are leading investment in renewables and other sustainability themes that will reduce dependence on Russian fossil fuels.

Sustainable Investing is about profits, not taking a stand

More on ESG 

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