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E
Environmental
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S
Social
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G
Governance
In a letter to CEOs, BlackRock’s CEO Larry Fink recently wrote: “I believe we are on the edge of a fundamental reshaping of finance.” Fink’s statement is significant as the ‘reshaping’ is being driven by an awareness of climate risk and, as BlackRock manages close to $7tn in investments, the financial world has taken note.
But what is ESG, where does it fit in to reshaping finance and how can investors use it as part of their decision-making process?
To start with the basics, ESG stands for Environmental, Social and Governance, measurements which can be used to assess how an asset is managed. Square Mile has developed an approach to analysing and articulating the various approaches to ESG as part of its research process.
Fund ESG rating
Company ESG rating
ESG definitions
The types of factors that can be included in each of the three categories are:
- Environmental - an organisation’s energy use, waste disposal, raw material sourcing, water usage, location of operations and pollution prevention.
- Social – an organisation’s diversity, employee rights, use of agency workers, labour relations and treatment of minorities.
- Governance – this would be illustrated by the composition of the company’s board, for example the diversity of gender, experience, etc., voters’ rights and remuneration policy. This is probably the area that most asset managers have been monitoring as part of their regular work and has been placed into greater focus as a result of recent events, such as the Volkswagen emission scandal and Sports Direct’s governance.
For investors, the use of ESG is seen as a way of enhancing returns by identifying and understanding the risks associated with a security, for example an equity or fixed income.
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Looking ahead
The CEO of the investment managers Schroders Peter Harrison has set out the opportunity for investors: “We think sustainability-driven investing will be one of the fastest growing and most exciting sectors in the coming years.
“Identifying investments which have a beneficial impact on society and the environment, as well as generating positive financial returns is of increasing importance to investors around the world.”
Square Mile’s ESG assessments are dynamic and are reviewed on an ongoing basis and will be a useful tool for self-investors.