The birth of a paradigm?

Even before the birth of the moniker, corporate social responsibility and sustainability have loitered around the foreground of investment analysis.

ESG is becoming increasingly prevalent as not only a part of decision-making but also, as a representation of what traditionalists would consider a new paradigm.

Never before have these non-financial factors become such a important issues, let alone formally recognised, so the current popularity of ESG signifies at least recognition of these factors as instrumental in long-term company valuation.

In the aftermath of the current recession, the mainstream has sought to identify non-financial factors relevant to long-term financial stability, and ESG has proven suitably broad-spanning. ESG exposures as part of long-term strategic planning are not only a forward-thinking and contemporary measure, but signify a change in thinking.
Efficiency runs alongside improved corporate-investor communications, and long-term metrics need to be aligned with the reinterpreted paradigm.

Not only relevant to companies but to individual investors too, financial advisers are finding more and more calls for advice on making the most of available ESG opportunities.

Environmental concerns?
Green, eco-friendly, sustainable – the danger of “greenwashing” is ever increasing. Greenwashing, discussed in TIME Magazine (‘Going Green’, September 22, 2008) is a term for where soundbites are essentially thrown around without practical impact. ESG as an umbrella term is intrinsically bound up with reputation, but companies do, however, run the risk of purely using these soundbites to implement change.

This would underestimate the ambit of ‘the environment’ as a header; environmental concerns do not just concern climate change, but also sustainability, pollution, carbon emissions and more.

These factors substantiate ESG’s focus on the long term to establish the financial feasibility of investment decisions, certainly a contemporary rethinking of priorities.

These complex issues are everyday concerns and offer environmentally and economically-friendly investment solutions. Social justice has been prominent for longer than ESG, particularly in the form of Socially Responsible Investing (SRI).

While SRI rethought the core financial criteria, ESG represents a rethinking of what it is exactly that does – or should – be reflected in investment decisions. ESG is certainly tied up with ethical concerns, but most interpretations focus purely on maximising financial performance. In spite of this, it is difficult to interpret financial performance and ethics as not being automatically bound up with each other.

A series of framework principles have been bubbling in the background, such as the Principles of Responsible Investing (PRI) and the OECD Principles of Corporate Governance. These principles provide a framework for incorporating ESG concerns into ownership practices and investment philosophies.

These two examples are merely a sample of the guidelines out there to help firms and individuals shift focus and help contribute to their ESG performance.

Indeed, there are many companies attempting to reformulate their ESG outlook, but because of the newness of this phenomenon – or rather its presence in the public eye – there are extremely high expectations to be fulfilled.

Corporate governance
Corporate governance is the least familiar arm of the ESG trio, but potentially the most potent. It essentially concerns politics: independence, compensation, shareholder and stakeholder rights and transparency.

In the context of ESG, governance discussions focus on how processes, customs, laws and regulations affect economic stability; honesty, trust, integrity, openness, responsibility and commitment run key throughout.

The common misconception surrounding governance lies in the fact that it is construed by some as solely concerning corporate management, whereas in reality, it concerns prevention as much as cure. Those in the know about ESG are aware that corporate governance must extend its reach way beyond the realms of administration and instead reach into something far broader in ambit.

Essentially concerned with getting the backroom to where the front page is, corporate governance is arguably the most distinct element of ESG.

As a relatively new phenomenon, investors are finding it difficult to understand and incorporate non-financial ESG metrics into their research models, which is why experts are occasionally drawn upon.

In this sense shareholders can gain an understanding of and acknowledge the huge importance of ESG management over the next few years, and as a guide out of present economic setbacks.

Just a few of the solutions to informing those who wish to implement ESG management is patience, time and positive learning programmes.

The ethics
On a more general note, ESG is undoubtedly a public interest matter, making it a figurehead for the acceptance and open-armed welcoming of policy concerns into investment consciousness.

ESG is a case of a series of topics becoming “part and parcel of the metrics used by investment professionals to analyse and value the public companies they invest in,” according to Kurt Schacht, CFA, managing director of the CFA Institute Centre.

Because ESG is non-financial, acceptance legislature and core principles are still in their early days, and so are still flexible to enterpretation.

And because there is such openness to the criteria, there are various amounts of discretion afforded to different companies, allowing them to maintain focus on their own terms, whilst offering their own solutions and performance to the general public. Benefiting each individual company’s own business model, the newness of the phenomenon means that criteria is constantly changing.

The future
The way that ESG ties up three unique and related sets of issues is certainly useful, but their defining common link is their focus on the long-term horizon. ESG is set in three contexts: (1) economic viability, (2) brand reputation and (3) short versus long-term effects. The latter of this trio is the biggest revelation to traditionalists, and has of course raised eyebrows.

However, most data suggests that in relation to the underlying principles of twenty-first century living and business. Interestingly, the importance of engaging societal concerns with modern day capitalism was framed earlier in the last century: “The social responsibility of business is to increase its profits.” Written by Milton Friedman in The New York Times Magazine on September 13, 1970, the statement has no less application in 2009, as more and more people consider the statement as pointing to the core responsibility of those in business not just to enjoy great profits, but to invest in a way that helps society.

One crucial point has been ignored – many of the points inherent to ESG have been considered as fundamental to businesses and enterprises for many, many years.

In this sense there are many new participants to the phenomenon who know a lot more about the industry than they realise.

With that in mind, environmental, social, and governance issues are in a healthy position to grow and prosper not just over the next few years, but over more of a long term and healthy future.

And finally ? what now?

ESG relating to investment forms the crux of much of the commentary, but in order to inform public perception, more discussion of its ethical validation is on it’s way over the coming months.

In this sense the coming months will see ESG raise it’s own standards, pursue further gains, and work on it’s current set of high and visibl standards. Also, it is widely considered that it’s predecessors – namely corporate social responsibility and sustainability – will be able to reinvent themselve and aim for a common goal of business and social development.

The healthy mixture of prevention and cure that the main ideas behind ESG seeks to pursue is commendable. Essentially, it wants companies to capitalise on new opportunities and risk identification, whilst working with their own business models to create more efficient and prosperous strategic gains within the industry. In this sense many of the companies participating are working off and with one another.

Different investors will differently apply their focus on environmental, social and governance factors according to their sector, planning and existing metrics. ESG is a brilliant move for market integrity, and further development of standalone or larger firms. The concept of ‘acting in the best interests’ is concrete and long term. The best thing investors and companies can do now is further research, and delve straight into the world of ESG.

World Finance ESG Awards, 2009

Best ESG Research House, Germany
WestLB AG

Best ESG Institutional Asset Manager, Netherlands
Syntrus Achmea Asset Management

Best ESG Asset Manager, France
Groupama Asset Management

Best ESG Wealth Manager, Netherlands
ABN AMRO

Best ESG Information Provider, Switzerland
ASSET4

Best ESG Asset Manager, Italy
Eurizon Capital, Intesa Sanpaolo Group

Best ESG Asset Manager, Sweden
SEB Wealth Management

Best ESG Asset Manager, Brazil
Itaú Unibanco Banco Múltiplo SA

Best ESG Research House, France
Novethic

Best ESG Microfinance Consultant, International
Perfect Point Partners

Best ESG Asset Manager, USA
ClearBridge Advisors

Best ESG Asset Manager, UK
Threadneedle Investment

Best ESG Institutional Asset Manager, Switzerland
SAM Sustainable Asset Management

Best ESG Institutional Asset Manager, Norway
DnB NOR Asset Management

Best ESG Research House, UK
EIRIS

Best ESG Research House, USA
IW Financial

Best ESG Asset Manager, Belgium
Dexia Asset Management

Best ESG Wealth Manager, Switzerland
Lombard Odier Darier Hentsch Group

Best ESG Asset Manager, Spain
BBVA Asset Management

Best ESG Asset Manager, Denmark