ESG stands for Environmental, Social and Governance. Financial planners can be guilty of using terminology without realising that their clients may not understand it. ESG has become very prominent in the world of investing (and rightly so) but for those who want a quick tutorial, here goes:
Definition of ESG
Environmental Social & Governance is a criteria by which a companies standards can be measured in a way beyond just financial, so that a socially conscious investor has a screen by which he can determine whether that company conducts itself in a way that matches the investors values.
So forget your EBITDA, Dividend cover, P/E Ratios. They’re still important, but if we want our investments to match our own values, we need to look beyond the numbers:
Environmental:
Probably the easiest to understand. A recent survey by the fund manager Franklin Templeton revealed that Financial advisers believe Environmental issues such as climate change, sustainability and resource efficiency are still the topics most investors are concerned about.
Oil and Gas tend to struggle in this area.
Social:
Social is really all about a company’s relationships. Relationships with staff, suppliers, customers and even communities.
Currently this measurement is affected by Covid 19. How has that company treated its staff? I have a client who has been reduced to a four day week but his workload and responsibilities have not altered.
Think of well known airlines obfuscating over refunds and perhaps just offering vouchers?
These are examples of poor Social practice.
Governance:
As the name suggests, this is all about leadership. It covers such areas as Executive pay, whether audits are revealing transparency in their financial dealings, what internal controls are in place to prevent fraud or even what rights are given to shareholders?
Good governance would see the boardroom engage with its shareholders and listen and consider their views and act upon them.
Conclusion:
For many of us, the financial return of an investment cannot come at all costs. We all have a voice with regards to our pension funds and our ISAs. We can bring about change. Perhaps talking to your adviser about ensuring your investments have an ESG screen is a great place to start.