Responsible investing is widely understood as the integration of environmental, social and governance (ESG) factors into investment processes and decision-making. ESG factors cover a wide spectrum of issues that traditionally are not part of financial analysis, yet may have financial relevance.’ Forbes, 2018
As we enter the start of the 2020’s, it is clear that the relevance of ESG– itself a spin off from socially responsible investing – is set to grow. It can provide investors with a reassurance that they are not exposed to unnecessary risk, and that they are not supporting companies that fail basic environmental and social responsibility checks.
The mission to generate a measurable score for diverse factors is not without its difficulties. On the environmental side of the spectrum, waste emissions can be calculated, and offset against carbon-positive activities. But how does one measure the social impact of a business, or the happiness of its employees? Does a company have a good health and safety record if zero incidents have occurred, or are there hidden hazards in the workplace?
At Emex we believe that an effective ESG strategy relies on holistic, accurate data. This data must be used in a predictive capacity: where are environmental issues likely to happen? What trends exist behind my employee satisfaction? If data is siloed, and merely used in a box ticking capacity, the validity of ESG is compromised. This is why we created our ESG brochure which can be downloaded here.
Having a poor, or incomplete, ESG reporting system indicates to investors that ESG is not top of the agenda, and unforeseen risks might be lurking. According to Cerulli research, in 2018 alone ‘due diligence questionnaire volumes increased 20% and request for proposal (RFP) volumes rose 13%.’ The volume of paperwork necessary for investment is becoming a huge issue. An effective ESG management system can help alleviate this, making capital more readily available for your business.
ESG is simply a mechanism for investors to balance environmental, social, and governance against traditional financial rating systems. As a broad rating it has the potential to miss risk factors, unless an intelligent approach to data collection is introduced. Being able to analyse on a site-by-site or employee basis enables investors to examine the reality behind the rating, making investment more attractive. Furthermore, it reveals to businesses themselves potential catastrophes waiting to happen and protect themselves from the consequences.