The acronym “ESG” stands for Environmental, Social and Governance and is a concept used in the financial world to measure the sustainability of an investment.
The environmental criteria analyse the impact of an investment focusing on waste and pollution, greenhouse gas emission, climate change, deforestation, water resources and so on.
The social criteria considers the working conditions, the relationships with employees, suppliers and customers, the interaction with the local communities and health and safety issues, while the governance criteria evaluates the company’s management, therefore accounting policies, executive remuneration, independence of the board, tax strategy, corruption and bribery.
In the last few years, the “Environmental” pillar has been the most famous, and the growing threat of climate change and resource depletion may explain this popularity.
Moreover, the compliance with the ESG criteria reflects the quality of companies in the long run, as demonstrated by the fact that businesses that apply ESG factors are generally best-managed, forward-looking and ready to deal with crises. For these reasons, ESG investing represents a great opportunity for investors.
In the context of the Covid-19 pandemic, the companies with high ESG ratings have performed better and have been awarded by the financial markets. This greater resilience is due to the integration of ESG factors, which represents a risk mitigation tool.
In addition, these businesses have better handled the crisis thanks to the low environmental impact, which kept them safe from the price collapse in high-carbon sectors.
On the other side, the Covid-19 pandemic has brought to light the social aspects (the “S” of the acronym), which had been a little forgotten if compared to the environmental ones, pushing some major firms as Morgan Stanley to declare that “with the disruption caused by the Covid-19 crisis, social considerations are back at the forefront of ESG”.
In fact, according to the experts, from now on the companies will be evaluated on:
- The relationships with their employees (e.g., the employee commitment) and their suppliers (e.g., local supply chains have permitted less business interruptions even with closed borders, because the businesses have been able to find raw materials from local suppliers);
- The working conditions (e.g., healthy and safe working place, flexible working hours, respecting workers’ rights);
- The relationships with their customers and the actions in support of the local communities (e.g., property companies offering rent deferrals, firms donating food to healthcare workers, businesses providing quickly masks and respirators).
Means more “S” less “E”?
The current year is bringing out social considerations, but the increasing importance of the “S” pillar could lead to a misleading thought: an increased interest in the social aspects implies less attention to the environmental ones, because the investors are focusing their attention on the health emergency and precisely for this reason the issue of climate change could be overshadowed by social considerations.
This way of thinking is completely wrong, because the workers benefit from both working conditions (“S”) and environmental ones (“E”).
Unfortunately, several people seem not to have understood that, and have proposed to remove some environmental requirements to respond to the crisis, relying on the fact that these regulations delay short term growth.
Obviously, large Institutional investors who are interested in sustainable investing are pushing for the growth of the three pillars (“E”, “S” and “G”) together.
In fact, also the “Governance” factor is considered an essential and transversal element, because a company couldn’t achieve its sustainability objectives without an effective and responsible management.
Therefore, it is clear that the pandemic has allowed to balance the three pillars of the acronym ESG and to give importance to the social sector.
Looking at the markets, Impact Investing is growing constantly: the current size of the global impact investing market amounts to $715 billion, according to the Global Impact Investing Network (GIIN) and despite the global pandemic, impact investors don’t seem to be scared and most of them maintain a positive outlook for the future.
Consequently, the crisis offers the opportunity to build a sustainable future, because the pandemic has so far shown the close connection between sustainability and resilience. For this reason, everyone (investors, companies, governments and consumers) will pay more attention to ESG factors and without a doubt all the three pillars are needed to restart the economy after Covid-19.