I have been urging people to look at better investments for the past 15 years and finally the theory has been tested.
Would Environmental, Social and Governance (ESG) investments do better in a crisis?
Yes, they did.
Most of the good performance has come by always adhering to Environmental, Social and Governance standards (ESG).
I know that my clients and most other investors understand the benefit to the environment and society. What I do not know is if other investors and their advisers understand that a fundamental change has already taken place.
The changes will continue, and it is going to be difficult to spot the difference between ‘greenwash’ and the real deal, now that the flood gates have opened.
The shift started during the financial crisis a decade ago. At the time I was asked to comment on BBC Bristol Radio on Ethical investing.
My strongest memory is of the journalist who expressed disbelief that it was possible to question your adviser, bank, or pension manager about the assets they held.
For my part, the idea that you hand over your savings without understanding what it was financing was unacceptable and contributed to the financial crash.
The easy bit has happened, alternative energy and battery storage, the development of better supply chains, new technologies.
Good Governance may be harder to define and challenge.
Shareholders must assert their power and, for the smaller investor, that means ensuring your fund or pension manager is taking their role seriously.
Making appropriate policy statements is not enough. Good governance needs scrutiny and challenge. In financial services as much as anywhere. Are the companies meeting your values and is the business well governed according to the UK Corporate Governance Code (2018)?
Principles
A. Successful companies are led by effective and entrepreneurial boards, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.
B. The board should establish the company’s purpose, values, and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example, and promote the desired culture.
C. The board should ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them. The board should also establish a framework of prudent and effective controls, which enable risk to be assessed and managed.
D. For the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties.
E. The board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success. The workforce should be able to raise any matters of concern.
The most significant change in the corporate world is that Shareholder value is no longer supreme.
The outcome will be that badly governed firms risk fines and public shame. The environmental or social damage caused by bad practices will no longer be overcome by good PR.
Well governed firms offer the most sustainable returns for the investor, the employees, and the community.
ESG investing is a journey not a destination.
