Written by Joshua Clarke
Environmental, Social, and Governance (ESG) considerations have already begun to permeate and impact the investment market. As the public become more socially conscious, the drive to only invest in companies that adhere to strong, socially aware, and environmentally conscious guidelines has become apparent.
The ESG considerations form themselves as a critical benchmark to measure both progress and risk while maintaining that companies will not wish to fall behind for this loss of potential investment. These criteria are notably more important for younger investors who tend to prioritise investments that remain closer to their values. To capitalise on these investors, companies such as Bloomberg offer large datasets of ESG metrics of more than 11,800 companies in over 100 countries so that such investors will be aware of which companies’ values coincide with their own.
Since 2011, the ASX has introduced a guide for companies to disclose their ESG risks in a consistent and comparable manner across the many different sectors that influence Australian business and investment. From its inception, the guide has been updated and evolved to cater for the changing wants of the Australian public. Strong corporate governance performance has always remained a necessity for investors, but the modern environmental and social concerns maintain themselves as new indicators of concern for potential investors. Due to the already extensive documentation of the expectations regarding corporate governance, it is recommendable that companies adhere to the guidelines as documented in the ASX Corporate Governance Principles as well as those of the ESG guidelines.
The key considerations that companies will wish to not only meet but exceed, surround three distinct aspects of corporate conduct:
The environment maintains itself as a key facet of interest for younger investors who wish to comprehend their potential investment’s energy use, resource conservation and treatment of animals, prior to investing into the company. Environmental considerations can also focus on evaluating any risk that a company may face in relation to the environment and how those risks would be managed in the future. How a company manages contaminated land, complies with domestic environmental regulation and their emissions, remain as key facets of the environmental considerations that are examined.
Examples of positive environmental criteria include:
- Using renewable energy.
- Putting out sustainability reports.
- Limiting harmful pollutants and chemicals.
The social criteria look at the company’s relationships and human capital management. This is important to investors as it is key to business growth, continuity, expansion, and innovation. Such human capital is invaluable for companies in adapting to an ever changing and more socially conscious world. These considerations are indicative of a company’s strong performance in relation to labour rights and compliance with occupational health and safety regulations.
Examples of positive social criteria include:
- Paying a fair wage.
- Policies to protect against sexual misconduct.
- Supporting LGBTQ rights and promoting diversity in the workplace.
Corporate governance considerations allow the investor to peek inside the managerial mechanisms of the company of their potential investment. The investor can look at the quality of risk oversight of the board as the representatives of shareholders and assure that the company is utilising transparent and accurate accounting methods. The investor can be assured that the company avoids conflicts of interests, doesn’t use political contributions for undue gains and avoids any illegalities.
Examples of positive governance criteria include:
- Promoting corporate transparency.
- Employing a CEO independent of the board.
- Embracing gender and cultural diversity on the board.
These considerations are indicative of the wants of a large group of socially conscious investors, no single company may pass every test and the investor will ultimately need to decide what is important to them and invest accordingly.
Thorough adoption of ESG considerations and guidelines presents a myriad of benefits for the company. It may enhance reputation, accelerate economic growth through value creation and increase shareholder satisfaction.
In conclusion, the management and propagation of ESG guidelines and criteria continues as an integral and growing part of the Australian investment. Companies that establish themselves as holding key long-term sustainable returns will see greater investment. Continuing social, environmental, and economic crises has reminded investors of the importance of investment considerations that cover a broad range of risk and opportunities. In order to capitalise on these socially aware investors and bring in greater investment, all companies should provide broad disclosure on their ESG considerations.
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