If you want to make a good impression these days with a powerful person, try using the word ‘sustainable’ in as many sentences as you can. It’s a word that is being bandied about by politicians and business leaders keen to demonstrate that they are using public and private resources in a responsible way. What was once considered to be the view of a radical, green minority is now mainstream and it is having wide-reaching ramifications. In the investment field, the term ‘ethical investing’ has now evolved into ESG investing, that is Environmental, Social, and Governance investing; an investment process that takes environmental, social, ethical, and governance considerations into account. Ethical investing is a relatively new concept and initially started out as a process where investors would avoid investing in companies that they felt had a negative impact on society, such as tobacco companies or weapon manufacturers. More recently, ethical investors have begun looking for sustainable industries to invest in, such as wind farms or waste management. However, the latest trend is the emergence of ESG investing in which investors are now scrutinizing the governance of companies and using their voting rights to promote sustainable investment. Many leading asset owners and investment managers around the world came together in 2006 and developed the United Nations Principles for Responsible Investment. This has attracted over 200 signatories from all over the world representing more than $13 trillion in funds under management. The list of signatories is growing every day with increasing momentum.
There are six principles that these signatories follow, of which the first three are the most important. The first principle requires signatories to introduce formal policies and procedures throughout their organization to ensure that ESG issues are being considered at all stages in the investment process. The second principle is about investors moving from a passive role as the arms-length investor to the role of Active Owner. That means engaging directly with companies about ESG issues or asking their fund managers to do it on their behalf and using their voting power to bring about change. The third principle states that signatories will seek appropriate disclosure on ESG issues by the entities in which they invest. Large superannuation funds are giving rise to the concept of the ‘Universal Owner’. These are funds that own small parts of an entire economy and spread their investments around the world. Because they have a long investment time frame (30 or 40 years), they look to invest in companies that will be sustainable over that time frame. That means adopting an ESG approach to investing. ESG is something that we should welcome. Ultimately, all of us want to grow our wealth, but not at the expense of a fair society or an unhealthy environment.