ESG Investing- Companies with a Conscience?
Written by Charan Naidoo
ESG has become a buzzword in the financial sector in recent years.
Read on as I explain what it is and why it matters to Not-for-profits (NFPs).
What is ESG?
ESG investing refers to the non-financial criteria through which companies are assessed, in addition to their expected financial performance.
The E in ESG, environmental criteria, refers to the actual or potential impact of a business’s activities on the environment. Factors include carbon emissions, waste management and energy efficiency.
The S in ESG, social criteria, refers to a corporation’s relationships with its people and its institutional stakeholders. This includes labour-management relations and human rights.
The G in ESG, governance criteria, concerns the way that businesses are run. It addresses issues such as corporate governance and diversity and inclusion.
In practice, ESG criteria are often intertwined. For example, governance criteria interact with social criteria when new racial diversity policies lead to greater employee satisfaction.
The Birth of ESG
The term ESG was first coined at the ‘Who Cares Wins’ conference in 2005. The final report from this conference concluded that better incorporation of ESG criteria into corporate management practices can increase value.
This report was endorsed by a global alliance of 18 financial institutions with total Assets Under Management (AUM) of more than $US6 trillion. Today, ESG investing is estimated at over US$20 trillion in AUM, or around a quarter of all professionally managed assets globally. Remarkable, isn’t it?
How is ESG relevant to NFP’s?
NFP’s often struggle to decide what to do with their excess funds.
ESG investing allows NFP’s to use these funds to create an investment portfolio which supports companies that align with their mission. This can extend and deepen their social impact.
For example, an NFP whose mission is to support heart cancer research could invest in the AMP Capital Sustainable Share Fund. This fund invests in companies which demonstrate strong ESG credentials, especially those conducting medical research.
An NFP which seeks to restore children in out-of-home care could invest in the Newpin Social Benefit Bond. It operates on a ‘payment by (social) outcomes’ structure under which investors share the financial benefits from the social impact of the Newpin (New Parent and Infant Network) program. This program has seen more than 60 per cent of children in out-of-home care restored to their families, well above the average of 20 per cent. This bond pays a minimum of five per cent interest for the first three years.
Doesn’t ESG compromise investment returns?
Many organisations have long shunned ESG criteria in the fear that it would compromise investment returns. Morningstar has found no evidence to indicate that (independently-rated) companies with good ESG credentials have underperformed companies with poor ESG credentials in the last ten years. In fact, Breckinridge Capital Advisors found that their top 100 ESG-rated companies demonstrated lower earnings volatility than the S&P 500 between 2007 and 2014.
NFP’s no longer need to sacrifice higher investment returns for social impact. Thanks to exciting new ESG investments, NFP’s can invest their surplus funds in companies with a conscience.
At 180 Degrees Consulting, we can help you determine if ESG investing aligns with your NFP’s mission and strategic objectives. Contact us here.