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When it comes to investing, ESG is one of the latest buzzwords. So what does it mean and, importantly, should you care?
There’s a lot of talk about ESG investing these days. The problem is it’s not always clear exactly what that is.
In fact, you’d be forgiven for assuming it’s primarily about climate change and the push to invest in renewable energy - a natural enough assumption given any ESG commentary is often accompanied by images of solar panels and wind farms.
However, the fact is it’s so much more than that.
ESG stands for environmental, social and governance. And when it comes to responsible investing, all three factors are viewed as essential in evaluating an organisation’s long-term sustainability. By investing in companies that set the very highest standards here, investors are selecting high quality assets - from both a financial and a non-financial perspective.
Take ‘environmental’. While this is about assessing a company in terms of its impact on climate change, it’s also a matter of getting comfortable with its environmental credentials, right across the board, including how it addresses any environmental risks or opportunities.
This means evaluating its impact on:
Together they provide a clearer picture of what a company is doing to hurt - or, preferably, help - our natural world. But they also tell us whether a company is vulnerable to the risks of climate change or environmental degradation, which ultimately goes to its financial performance.
Social factors also give us a better idea of a company’s sustainability. Fundamentally, it’s about how a company engages with the community and with society as a whole – how it works to create a fair and diverse workforce and social opportunities for all.
In practice, this means assessing a company’s:
In addition, it’s about assessing a company’s record as far as equality and human rights are concerned - something that necessarily extends to its supply chain. For example, it’s vital to question whether any of the organisations a company relies on have links to modern slavery, such as forced labour or the slavery of children.
All of these go to the strength of a company’s ongoing work practices, but also to its ‘social licence’ to operate - the trust and confidence that’s fundamental to a company’s continued wellbeing. If it has the support of its employees, its customers, its community, it’s much more likely to survive and thrive.
The issue of governance is critical too. Think: if a company isn’t run well, how can you trust that it’s doing its best for the environment or society?
Governance is about how a company manages itself, but it’s also about how it creates frameworks and strong lines of communication to ensure that it’s accountable as well as efficient.
This means a company should be judged on its:
At a time when the science says we need to act on climate change now – a growing number of people are looking to invest in society’s leaders: those companies that can best be trusted to take care of our world. It’s one of the overriding reasons why ESG investing has gained such momentum in recent years.
It isn’t the only driver though. Government regulations are also demanding action, while many companies are themselves responding to commercial considerations, including access to additional ‘green’ funding.
Putting it into practice can be a little more challenging. After all, best practice in one industry can look entirely different from best practice in another. And how do you balance competing issues, such as protecting land clearing while also protecting people’s jobs? At the end of the day, it’s not simply a matter of avoiding, or selling, certain shares.
Let’s consider an example. It could appear virtuous to never invest in a manufacturing company that needs to improve its ESG measures. Alternatively, you could invest in a company that is taking action to improve its ESG credentials, and by our engaging with them we can increase the speed of improvement.
This approach allows us to capture the financial benefit of that improvement and, we can help ensure the company is becoming more sustainable to make the world a better place.
Important information: This document has been prepared by IOOF Investment Management Limited (IIML) ABN 53 006 695 021 AFSL 230524 as trustee of the IOOF Portfolio Service Superannuation Fund (Fund) ABN 70 815 369 818. It contains general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this information, you should consider whether the information is appropriate for you having regard to your personal needs, financial circumstances or objectives.
You should obtain and consider a copy of the relevant Product Disclosure Statement (PDS) before you acquire, dispose of, or continue to hold an account in the Fund. Target Market Determinations (TMD) for relevant products in the Fund are also required to be made. You can obtain a copy of the TMD and PDS from our website.
Information is current at the date of issue and may change. IIML is part of the Insignia Financial Group of companies, consisting of Insignia Financial Limited ABN 49 100 103 722 and its related bodies corporate.