By Marta Maretich
Here’s a riddle: Investors are demanding them. The global business community is boosting them. Companies large and small are trying to figure out how to produce them. What are they?
You guessed it: Extra-financial performance results — the environmental, social and governance (ESG) metrics that demonstrate that a company is acting responsibly as it conducts its business. In a major shift in global attitudes toward sustainability and a more responsible role for business in society, this fast-growing area is now a major focus for businesses and investors alike.
Several factors are driving the shift. Increased concerns about the effects of climate change are leading citizens and governments to demand tougher environmental regulations for businesses (E). Social factors (S), such as human rights abuses, are now recognized as material risks. Poor governance is widely seen as a factor in the financial crash of 2008, sparking investor demands for more information about the G in ESG. Meanwhile, evidence is mounting that shows companies that pay attention to extra-financials actually perform better in the long term.
Investors controlling billions of dollars, such as the Rockefeller Brothers, The Wallace Fund and Ben and Jerry’s, all divested their holdings in fossil fuels in an effort to combat climate change. More of this is coming. Major institutions such as museums, universities, city governments and pension funds are all feeling the pressure to divest.
Private investors are an important part of the trend with some 70 percent now expressing an interest in investing with a conscience. As a result, asset managers in many parts of the industry are climbing on board and looking to expand their expertise in what is a strong growth area of the market.
For companies, there is increased pressure to track and report ESG performance, an activity that costs organizational resources and must be carefully managed for good results. Luckily, attitudes toward ESG are changing across the business world. Top executives no longer see it as mainly a reputational or branding exercise. Rather, ESG-competence is emerging as good business practice that can foster innovation, lead companies to identify efficiencies and help manage risks.
Embracing ESG reporting provides greater access to capital, too. It’s a necessity in a climate where investors will turn down deals with companies that don’t disclose well enough or don’t disclose at all.
Across the world, companies are racing to incorporate ESG into their monitoring and reporting frameworks. To help them, the Global Reporting Initiative (GRI) provides a range of resources, including this one for absolute beginners. GRI starter kit. Other groups, like the EVCA, a European group of private equity investors, have developed their own framework to help businesses disclose ESG performance.
The UN-sponsored Principles for Responsible Investing (PRI) initiative has been around since 2005 and today has 1,371 signatories around the world. The PRI provides a framework for incorporating ESG concerns into investment practice as well as reporting. It now includes a climate change pledge for asset owners.
Global investors are banding together around ESG, joining groups like the Global Sustainable Investor’s (GSI) Alliance. The Alliance supports progress in sustainable investing by identifying trends and acting as a network for national groups. It has attracted important national members including Europe’s Eurosif, British UKSIF, American US SIF, Canadian RIA and the Asian region ASrIA.
Standards are also being developed to help investors compare ESG performance across companies. The CDP amasses disclosure data on climate change issues and works with investors and companies to improve performance and reporting. Today its membership includes more than 822 institutional investors representing in excess of US$95 trillion in assets. In 2014 the CDP scored over 4700 companies on climate-related performance.
Meanwhile, the Sustainability Accounting Standards Board (SASB) is establishing the materiality of sustainability issues, applying an accountancy approach to determining their value. Operating as a nonprofit, SASB makes its standards in areas like healthcare, infrastructure and renewable resources available online to investors and businesses alike.
Marta Maretich writes about impact, sustainable and social investing for Maximpact.com, a deal listing portal and information hub for the new finance sector. She is Chief Editor of the Maximpact blog.
About Maximpact: Maximpact is a free global portal for the social, impact and sustainability sectors. It operates as a secure web-based listing service that allows sustainability, philanthropy and CSR professionals, as well as entrepreneurs, intermediaries, and funds to share information about initiatives and impact investment deals, online. For more information on the platform or to review latest impact projects visit: www.maximpact.com. This article first appeared on Maximpact’s blog.