Environmental, social and governance (ESG) — used to measure the sustainability and societal impact of an investment — is not a new phenomenon.
However, in the last two years or so, it is fair to say these funds, designed to help the environment and promote social good have moved from a niche investment vehicle to the mainstream of most pension strategies.
This significant change has come about because of a combination of factors. For example, and importantly, not only do companies with a good ESG rating often represent effective investment options, but also increasingly savvy investors realise they can make a difference on these issues as a collective power.
The growth of this type of investment is particularly pronounced in the pension auto enrolment space, where most of the main providers offer funds on a full or partial ESG basis.
Here, rising awareness of the power of pension funds to influence corporate behaviours has meant people are engaging far earlier than before with investment performance and where these assets are allocated.
QUANTIFYING ESG PERFORMANCE
But what does it mean if you’re told your investments are in ESG-related funds? How are companies assessed? How they monitored? Are there consistent standards? And how can you make sure your investments meet your ESG criteria?
The answers can be complex.
There are 34 standard global reporting initiatives (GRIs) used to assess a company’s ESG credentials. But they may not offer the same result: analysts will have different views of the priority of any given factors and their ratings will reflect that.
For example, all analysts will assess a company’s environmental management of climate change, water resource usage and impact on forestry, but some may or may not prioritise the way a company manages its tax affairs or occupational health and safety to a similar degree as others.
An interesting example in the variances of weighting is TESLA, which is universally highly rated for its stance on using electric vehicles to promote clean energy; however, its position on non-union recognition and certain health and safety aspects within its Gigafactory has seen variations in how different agencies approach its ESG rating.
Equally, a universally recognised factor of gender equality can be differently assessed.
For example, one analyst may judge this on the level of representation of women on the board, others may use a gender pay gap report. Both are equally valid, but could a result in a different ESG rating.
As such, for those pension members who prefer to take a more active role in their investments, and are keen ESG figures prominently, it pays to compare the analysis of proposed company from more than one agency to ensure your investment criteria are fully met.
As the growth of ESG-based investment grows globally there is no doubt that there will be a desire to bring even further consistency and uniformity to these ratings as it will benefit the investor and the companies involved.
Plus, it remains to be seen if supporting genuine ESG strategies moves from a client preference to something that’s essential for survival for asset managers as public and political awareness around environmental, social and governance issues continues to grow.
Nigel Saunders is an Employee Benefits Consultant with Acumen Employee Benefits. email@example.com