Is ESG Investing Sustainable?
Is Environmental, Social, and (Corporate) Governance (ESG) reporting and investing sustainable? Sustainability is defined as development that meets the needs of the present without compromising the ability of future generations to meet their own needs. Supporters of the ESG model argue that not only is the practice of ESG investing due to increase, but that companies that adopt ESG reporting inherently improve their business sustainability.
Business sustainability often focuses on managing the triple bottom line of financial, social, and environmental risks. Mitigating the risk of losing investment or customers due to poor ESG standards is vital as millennials begin to comprise a larger segment of the pool of investors. Indeed, Morgan Stanley Bank recently found that nearly 90% of millennial investors were interested in pursuing investments that reflect their personal values. Boycotting is also becoming more commonplace when consumers disagree with the ethics of a company.
To better understand the risks of not ensuring a supply chain is adhering to ESG standards, consider the impact on companies that sourced cotton picked by the Uyghurs in Xinjiang, China. Many of the world’s largest fashion retailers were forced to assess their supply chain. This is not a simple process however, as supply chains are often convoluted with a lot of subcontracting occurring. Nevertheless, strong ESG reporting would require these large chains to understand where and how every component of their garments are made.
Had retailers failed to shun Xinjiang cotton, they would have experienced global boycotting of their products. Therefore, being socially responsible and having strong governance practice allowed for the risks to be mitigated and the business to sustain themselves through an international human rights crisis.
The Xinjiang cotton event fell into the ‘Social’ component of ESG. There is a need for corporate social responsibility (CSR) whereby companies must consider the impact of their corporate activities on the communities within which they operate. As for ‘Governance’, companies had to reconsider their supply chains and look to reducing the convolutions so that accurate reporting could then occur.
Corporate Governance
Corporate governance is the most difficult aspect of ESG to define. Simplified, it is the ethical leadership of a company with robust internal governance mechanisms which aim to ensure board independence, accountability, and transparency.
Poor corporate governance was attributed to the collapse of several companies in the financial sector when the Cadbury Report (1992) (http://cadbury.cjbs.archios.info/report) was published and yet companies are still failing to learn the lesson, as seen by the recent VW emissions scandal. Governance is increasing in value to the consumer as they experience greater choice in the market and can decide where they want their profits to flow. Companies that are deemed dishonest or corrupt will quickly lose support in the global market and competitors are ready to fill the vacuum. It is therefore vital to a business’ sustainability model to ensure that they are meeting the ‘Governance’ aspect of ESG.
ESG sustainability – business and investment
Business sustainability is improved with the integration of a strong ESG model, but is ESG investing sustainable?
Just as CSR has become absorbed into the ESG movement, so too could ESG be eclipsed. However, the core components of ESG – the demand of the global population that companies operate ethically towards the planet and people, is only going to grow in momentum. This means that critics of ESG investing who argue that investment should be based on the bottom-line profits alone will have to accept that profit is no longer the most important factor to the new generation of investors.
The sustainability of ESG investing is assured. We have a generation looking to invest only in those companies which can ensure their ethical treatment of both planet and people. The socially conscious investor will take a slight hit on their profits in turn for doing no harm and as this becomes the normal standard, businesses will have to adapt.
