What is ESG? Will it matter more than the bottom line?
There have been a thousand-and-one articles written since the pandemic on people’s changing attitude to work. Millennials and the generations that follow them – so we are told – want different things from work. Flexibility, the option of working from home and, above all, to work for a company that shares their values: that values purpose as much as profit.
It is not surprising then that we are hearing more and more from companies about ESG – their environmental, social and governance credentials. What really is ESG? And can it possibly matter as much as profits? After all, without profit you cannot pay your employees: you cannot re-invest in the business and you cannot pay dividends to your shareholders.
You could argue that companies’ concerns with ESG are not new. The origins could be traced back to the 1800s when religious groups such the Quakers and Methodists ran their businesses according to socially responsible principles, and established socially responsible investment guidelines for their followers.
More recently – in 2006 – the United Nations launched a set of six investment principles which perhaps started the incorporation of ESG into mainstream investment practice. Simply put ESG criteria judge how a company meets its environmental obligations, how it manages relationships with employees, suppliers, customers and the local community and the principles, composition and behaviour of the leadership team.
By the same token ESG investing looks to invest in companies that espouse those values. This, in some ways, brings us back to the generations mentioned above. Millennials and their successors not only want to work for companies that share their values, they want to invest in them as well. Often they want to go one step further, and make investments that have a positive and measurable social and economic impact.
“Impact investing,” as it has been dubbed, is now the fastest growing area of responsible investment. The World Economic Forum estimated that $1tn (£730bn) of assets were committed to impact investing in 2020, with the sector forecast to grow at $250bn (£183bn) annually.
It is small wonder then, that companies are paying more and more attention to meeting their ESG obligations. Of course the bottom line remains important – although many of us remember Uber famously being valued in the billions despite saying that it may never make a profit – but now both investors and employees are using other criteria to judge companies. You will hear a great deal more about ESG and impact investing in the months and years to come.