ESG stands for: Environmental, Social, Governance criteria – see detailed chart courtesy of Market Business News.
On an individual level, it is hard to comprehend the sophistication of global ESG business organizations’ drive to save the earth, ramp up social responsibilities, and clearly define good governance for democratic operations in industry and life.
Brief History
More than half a century ago when baby boomers were idealistically young, the gradual awareness of the life-changing necessity of just caring for Mother Earth (the newspaper, too) was in vogue. Reuse, reducing, recycling: volunteers spent weekends collecting bottles in bins, breaking them up with baseball bats; sorting aluminium cans, and newspapers for hopeful sale to recycling markets.
These small community efforts gathered steam motivating generations of tree huggers, back to the landers, organic gardeners, and individualistic life stylers to minimize their carbon footprints.
The publication of Rachel Carson’s Silent Spring, 1962, was the most powerful catalyst in the recognition of environmental damage at a profoundly personal level, but initially, relatively ignored by industry. Her prescient warnings along with the incessant efforts of thousands of truly committed individuals and organizations over the years literally changed government policies, launching the modern global environmental movement.
The ESG concept evolving as the trifecta of environment, social, and governance criteria now represents the full-scale involvement among nations: the United Nations, OECD, United States Securities and Exchange Commission, European Central Bank, World Bank, International Money Fund, World Economic Forum, just some among so many, many more.
All Very Informative, But How Will It Benefit You, The Investor?
Major industry CEOs have affirmatively, and imperatively stated that their company policies will comply with ESG guidelines. Such commitment indicates that their company ESG philosophy will be rated, scored, and publicly disclosed, possibly, increasing peer pressure on non-participants.
Investors, both retail and institutional, have been given compelling new decision choices. They can review a company, a fund, an industry, or even a country, a state, a government, a national pension or sovereign fund’s score in deciding whether to take, or sell a security position, provide a loan or work in related financial matters.
This is sustainable finance being actioned, money speaking louder than words as documented surveys indicate that the company with a social conscience is financially more profitable than one that does not adhere to ESG guidelines.
Who Provides These Ratings and How?
Experienced industrial and investing specialist third-party ESG data analysts provide independent validity of results. Numerous ratings services exist, among them but not exclusive are:
Bloomberg ESG Data Service, launched 2009
Dow Jones Sustainability Index, partnering with RobecoSAM, l. 1999
MSCI ESG Research, l. 2010
Thomson Reuters ESG Research Data, l. 2009
Sustainalytics, Morningstar, i. 1996
Ratings Results Combine A Series of Detailed Metrics
ESG Rating Scale and Methodology is staggering in detail – metrics range from the broad overview in enclosed chart to hundreds of industry-specific subgroups. Data is screened from thousands of sources: current press topics, company disclosures, macro data at segment or geographical level from academic, government, NGO databases and more.
Ratings rank from alphabet, number comparison against sector/industry groups, etc. Finance websites, such as Morningstar, use 1-5 globe (in emoji pics) rankings while Yahoo! Finance uses percentages against peer groups.
Interestingly, there is additional component, the Controversy Level ranking – defined by CNBC as ““when a company’s activity has unintended and/or undesired negative environmental and/or social effects on stakeholders, with corresponding reputational risk, that also at extreme risk times, can have a massively negative impact on company share prices.”
The Power of Public Opinion Translating to Investors’ Decisions
ESG compliance is, should, and will continue to be taken seriously as the social conscience momentum continues to grow.
When it is more profitable to do good, everyone benefits and euphemistically, the world is a better place for all mankind.
Investors, those Morningstar little globe emoji-like ratings? If you’re doing your research and are interested in investing in companies with a social conscience, which stock, bond, mutual fund, ETF, etc. would you choose?
The investment with a two-globe rating, or the one with five?
References:
United Nations PRI Principles for Responsible Investment
Market Business News What is ESG? https://www.youtube.com/watch?v=1GTmreIkt48&t=51s
Rachel Carson Silent Spring 1962 “Only within the moment of time represented by the present century has one species — man — acquired significant power to alter the nature of the world.”
Harvard Law School Forum on Corporate Governance: ESG Reports and Ratings: What They Are, Why They Matter, Betty Moy Huber and Michael Comstock, Davis Polk & Wardwell LLP, July 27, 2017
McKinsey Quarterly 2019 Nov 14 : Five ways that ESG creates value. Witold Henisz, Tim Koller, and Robin Nuttall
More from Investing Today by Clarien:
ESG: Investing With a Social Conscience
The Patient Investor: Playing the Long Game
She’s a Millennial with Hard-Earned Savings. It’s Time to Invest
For more information, visit www.clarieniinvest.com
Martha Harris Myron, a native Bermudian with US connections, is a qualified international cross-border financial planner, the author of The Bermuda Islander Financial Planning Primers, since 2016, a Google News Contributor (50+ articles), international financial consultant to the Olderhood Group Bermuda Ltd., and financial columnist to The Royal Gazette. Contact: martha@pondstraddler.com
