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E nvironmental

S ocial

G overnance

ESG Investing A powerful disruptor

What is ESG (Environmental, Social and Governance) Investing and why does it matter to investors?

Go back in time just a few years and you will quickly observe that the movement of ESG (Environmental, Social, Governance) investing has radically changed from just animal welfare issues to a far more comprehensive set of values and criteria in just a very short period.

ESG investing ia an investment approach which takes explicit account of the environmental, social and corporate governance aspects of all proposed investments.

ESG investing has now become a powerful disruptor.

Common terms to express ESG investing include the following:

What are the principles of ESG and how do they impact the company's held within an investment portfolio?

To assess a company based on environmental, social, and governance (ESG) criteria, investors (ordinarily fund manager groups) look at a broad range of behaviors that apply to that company in the market sector within which they operate.

Environmental

Environmental criteria may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals.

The criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks.

For example, s company should be asking itself whether there are issues related to its ownership of contaminated land, its disposal of hazardous waste, its management of toxic emissions, or its compliance with government environmental regulations?

Environmental factors also now include the contribution a company or government makes to climate change through greenhouse gas emissions, along with waste management and energy efficiency.

Given renewed efforts to combat global warming, cutting emissions and decarbonizing has also become ever more important.

Social

Social criteria looks at a company’s business relationships.

Does the company work with suppliers that hold the same values as it claims to hold? Does the company donate a percentage of its profits to the local community or encourage employees to perform volunteer work there? Do the company’s working conditions show high regard for its employees’ health and safety? Are other stakeholders’ interests taken into account?

Social also includes human rights, labor standards in the supply chain, any exposure to illegal child labor, and more routine issues such as adherence to workplace health and safety.

A social score also rises if a company is well integrated with its local community and therefore has a ‘social license’ to operate with consent.”

Governance

With regard to governance, investors may want to know that a company uses accurate and transparent accounting methods and that stockholders are given an opportunity to vote on important issues.

Investors may also want assurances that companies avoid conflicts of interest in their choice of board members, don't use political contributions to obtain unduly favorable treatment and, of course, don't engage in illegal practices.

Governance is one of the ESG factors where institutional investors can engage companies and open dialogue that can result in meaningful change.

Investment stewardship or corporate governance, is engagement with companies to protect and enhance the value of clients’ assets.

Through dialogue and proxy voting, institutional investors primarily engage with business leaders to build a mutual understanding of the material risks facing companies and the expectations of management to mitigate these risks.

Identifying and managing relevant ESG risks therefore are an important component of the engagement process and to encourage sustainable financial performance over the long-term.

What is driving the ESG impetus?

Regulatory standards (themselves under constant review by governments, authorities and professional bodies) are demanding ever tighter compliance.

During the recent Covid-19 pandemic an inflection point has been created for many companies and has been a catalyst for change.The following bullet points provide some of the rationale for the surge seen in the ESG investment space.

  • Covid-19 has highlighted issues related to global pollution - the substantial reduction of pollutants during the pandemic has been noted and many now wish to continue the drive towards a cleaner world.

  • Stakeholder & shareholder relationships are rapidly changing whereby stakeholders themselves are increasingly demanding compliance with ESG principles.

  • Governments are demanding ESG responsibility from companies that now require financial support during the Covid-19 pandemic.

  • Populism and political drivers are very much in evidence driving even greater awarenes of ESG principles.

  • Aged fund managers are giving way to younger fund managers who themselves are far more focused on ESG responsibility.

  • Companies having and adhering to ESG principles are increasingly attracting main stream investors.

  • ESG investing is becoming supercharged with Trillions of USD inflows from across the globe as the switch from mainstream to ESG funds takes place.

  • Companies looking to transition to ESG principles are most likely to survive in the current market and become stronger over time.

It was once the case that being an ESG investor meant accepting a trade-off when it came to investment portfolio returns. This is no longer the case and recent data illustrates that ESG investment has outperformed traditional equity investment portfolios.

Both TAM International & Momentum Harmony offer ESG driven portfolios - use the buttons below to read more about each comapny's offerings.

This is no fad. The world is truly in the midst of a climate emergency, which could have drastic consequences for markets, companies and, therefore, our clients’ assets. Mark Carney climate change and financial stability speech at Lloyd’s of London 2019

The evidence on climate risk is compelling investors to reassess core assumptions about modern finance… In the near future, and sooner than most anticipate, there will be a significant reallocation of capital Larry Fink BlackRock Investment Management CEO - January 2020

The Tide Has Turned

BlackRock and State Street, two of the three largest asset managers globally, sent open letters to CEOs of large companies identifying climate risk as a priority going into the 2020 proxy season. CEO letters from BlackRock’s Larry Fink and State Street’s Cyrus Taraporevala have now become annual pre-proxy season media events.

BlackRock’s 2020 letter notes that “…we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.”

Watch Larry Fink on the CNBC Squawk Box show discussing ESG investing

State Street’s 2020 letter notes that “…[we will] use our proxy vote to press companies that are falling behind and failing to engage [on sustainability].”

The prospect of a vote against management by an asset manager that controls a larger than 5% stake in most large companies represents a powerful inducement for management to reach understandings with investors that have filed shareholder resolutions addressing ESG issues. This thereby implicitly sets expectations for engagement outcomes, whether undertaken directly or by other investors.

Organisational Divestment

To illustrate further that not only are governments and asset managers forcing change organisations with strong social and ethical principles are also leveraging their strength.

In a recent announcement the CalSTRS (California State Teachers' Retirement System) announced the removal of more than $237 million in tobacco holdings from its investment portfolio after 6 months of financial analysis and deliberations.

Consider Your Portfolio

If you feel that an ESG portfolio would benefit your investment objectives take a closer look at either of the discretionary managed portfolios offered below.

The ESG Debate

In the wake of the Covid pandemic many are now realising that the virtues of ESG investing provide both social acceptance and profitability.

In the two Morningstar videos below 'Passive or Active Management For ESG Investing"and "It Is Now Time To Take ESG Seriously" the old myths of ethical investing are firmly debunked whilst direction is provided for the best way to invest with ESG principles.