ESG Overview - What is ESG?
- Environmental, social, and governance factors help investors measure the sustainability and social impact of a business
- ESG is being used as a measure to predict a company's
future financial performance
- "Doing good while doing well": a higher ESG score has been linked to profitability
- Asset managers are increasingly focused on ESG, which has become an important factor in their investment decisions
- Companies are increasingly providing disclosure of ESG metrics
ESG Overview - Breaking Down ESG
Environmental:
- What impact (positive or negative) does the Company have on the environment?
- Considerations include environmental risks and opportunities, reducing the Company's and its partners' carbon footprint, greenhouse gas emissions and clean energy
Social:
- What impact does the Company have on the company's stakeholders and society generally?
- Considerations include labor relations, human rights, safety, product integrity and employee morale & turnover
Corporate Governance:
- How is the company run?
- Considerations include diversity, board independence, executive compensation, and policies for reporting & disclosing information
Who is Driving the Emphasis on ESG?
- Large investors, such as BlackRock and State Street
- Directors – want their companies to be identified as leaders in this area
- Business customers (particularly in Europe) increasingly link purchasing decisions to ESG matters
- Business customers (particularly in Europe) increasingly link purchasing decisions to ESG matters
- " Employees – in technology and other areas, employees are feeling increasingly empowered to insist that their companies pursue and achieve ESG; this, in turn, becomes an employee retention and attraction matter
- Government regulators – both in the EU and the SEC in the United States
Notable Aspects of the Current ESG Landscape
- Companies find themselves forced to expend dedicated resources
to address a proliferation of ESG assessments, issued by
organizations such as SASB, GRI and TCFD
- Driven by customer requirements and public perception goals
- Companies are increasingly including ESG factors in their
executive compensation programs to incentivize the achievement of
ESG goals and manage ESG risks
- Compensation Committees wanting to drive ESG-centric behavior
- Companies continue to issue green bonds and other sustainable
finance bonds ($417.8 billion issued in first half of 2022
according to Climate Bonds Initiative)
- There is a growing desire for these types of investments among individuals and some institutional investors
Notable Aspects of the Current ESG Landscape (cont.)
- The amount of ESG-related litigation has increased and
continues to grow
- In particular, there has been a rise in the number of suits "alleging greenwashing" – where plaintiffs allege that companies have made misrepresentations about their environmental practices, achievements and commitments
- ESG-driven activist campaigns
- Climate-focused activist shareholder won three seats on ExxonMobil's board in a proxy fight using ESG themes to argue for needed changes in board composition (2021)
- More traditional activists have been raising ESG issues as a platform to gain support for campaigns
To view the full article click here
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
