ESG investing: Social governance

Following many years of observation and deliberation, the jury is in on ESG (Environment, Social & Governance) investing – and the verdict is clear, investors are taking it seriously and so should every boardroom.

Figures released in this year’s Responsible Investing Benchmark Report indicate that not only has responsible investing tripled to over $622 billion in assets under management in the past three years in Australia, but responsible investment funds are also outperforming mainstream funds across terms of three to 10 years.

According to Simon Arcus, Head of Governance at the Global Governance Initiative, the figures indicate a generational shift that directors of related organisations need to take seriously.

“The data globally shows a shift in investor priorities and we can only see that increasing as millennials begin to make choices about their own funds. Values based decisions are increasingly coming into play in investment choices and this is something that directors need to acknowledge, respond to and plan for.”

Arcus says that data from the report illustrates that some of the fears about ESG strategy producing lower returns seem unfounded.

“Retail and institutional investors are now putting companies through robust ESG assessment processes and, based on the growing shift towards ESG investing over the past two years especially, future investors will increasingly expect more than just strong financial returns. Investors will be seeking alignment with their own ESG values, which may require companies to prove their unwavering commitment to the environment, society and labour rules for example.”

While the definition of ESG, and its parameters, are still evolving, Arcus says boards need to consider social and environmental implications when defining the strategic objectives for their companies.

“Our examination of the literature and research indicates that to ignore or underestimate the importance of ESG poses a serious risk to boards. The challenge to boards is to develop the ESG approach that they are ready to commit to and is relevant to them. To do this it must not only enhance their business strategy but also resonate with investors. Finding the balance between the two must be high on the agenda in any boardroom.”

Global Governance Initiative was founded to improve organisational performance by making leading governance resources available to all businesses. To stay up to date, sign up to join the GGI Community.

GGI’s purpose: To ensure all businesses, regardless of size or financial ability, have access to leading corporate governance resources to support and enhance their performance.