ESG. What does it mean and why is it important to investors?



ESG stands for Environmental, Social & Governance. In business terms, it refers to non-financial factors that can impact business success, helping investors identify risks and opportunities to ensure that their investments are both responsible and sustainable.

Why is it important?

Investors are becoming increasingly conscious of their obligation to invest responsibly and equally and how this can provide them with the best return on their investment in the long term.

When making investment decisions, investors are now looking at aspects such as; how companies are responding to climate change risks, their response to the impact of Covid-19 on their workforce or if their supply chains are compliant with the modern slavery act 2015.

These sorts of issues can assist with evaluating whether an investment will have long-term sustainability, along with assessing if it will be seen as a socially responsible investment supporting global welfare.

Do Companies have to Report on ESG?

Although ESG reporting is not mandatory, it is becoming much more common for businesses to disclose this information in their annual reports, especially as they are aware that it is increasingly on investors' radar. As discussed in our recent blog on Green Tech, a global focus is on driving down production costs in this area. Therefore, a company with good ‘Green’ credentials will be more likely to have lower overheads and sustainable financial success, which companies will want to advertise to potential investors.

What Counts as ESG?

Currently, there is no universal model for the reporting of this data. Still, several organisations are working on defining some industry standards for this, including the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the Task Force on Climate-related Financial Disclosures (TCFD). The CFA Institute has created a helpful reference table, separating Environmental, Social and Governance factors to illustrate what companies can measure.

What does the future hold for ESG Reporting?

As the importance placed on ESG grows, its reporting and regulation will also evolve. In November, regulators set out a global framework to crack down on ‘greenwashing’ (where environmental credentials of investment or activity are overstated). The start of this month saw the launch of ESG BOOK, a data platform developed by asset manager Arabesque with public support from HSBC, Deutsche Bank and Swiss Re. to provide free ESG information for companies and investors. Companies can use ESG Book at no cost to disclose, manage and keep ownership of their ESG data in real-time. The data is then available to users for free, with a charge for data analysis.

As ESG disclosure becomes more transparent and greater significance is placed upon it, perhaps it’s in the hands of investors to help create a better, more sustainable and financially rewarding future for all on a global scale.

If you’re looking for your next career move in governance, investment banking, risk or any of our specialist areas, talk to McGregor Boyall today and find out how we can help.