Why Focus on ESG?
What is ESG?
“ESG” refers to Environmental, Social & Governance factors (including those related to climate change) that may represent business risks and/or opportunities that can impact a company’s performance and valuation.
There is growing realization that ESG factors are material and can have a direct impact on the long-term success of a company. Research shows that companies that manage these factors well perform better over the long term across a variety of measures, including:
Lower cost of capital
Better operational performance
Better share price performance over the longer term.
As a result, investors are increasingly integrating ESG factors into their investment process in order to ensure that they fully understand the risk and opportunities each company represents. In addition, they are increasingly encouraging the companies in which they are invested to improve their ESG-related policies and practices and to better disclose their approach to investors.
What is the difference between CSR and ESG?
The terms “ESG” and “CSR” (Corporate Social Responsibility) are often used interchangeably. However, they are distinctly different and it is important for companies to understand the difference given investors' focus on ESG. For more on the difference between ESG and CSR, take a look at our piece A Material Difference: The Distinction Between CSR and ESG.
What does this increased focus on ESG mean for you?
Companies need a robust process to identify and manage ESG-related risks and capitalize on related opportunities. Ultimately, ESG factors are the responsibility of the board of directors who are accountable for the oversight of a company’s strategy and performance. Proactive ESG strategies can be instrumental in avoiding votes against management proposals, including ‘say on pay’ and the election of directors, can help ward against becoming the focus of activist investors, and can result in a better assessment of a company's ESG policies and practices.
Institutional investors need to develop a process to integrate ESG factors into their investment process for each asset class they manage or oversee, in a way that will add value by better identifying risk and helping to identify companies that will outperform in the future. Increasingly, institutional and retail clients, as well as pension fund beneficiaries, are demanding that institutional investors have an effective approach to integrate ESG into their investment process. They also expect asset managers and pension funds to use their position as shareholders to encourage ESG-related improvements in the companies in which they are invested.