Making a difference in society is often connected to politics, lobbyists, NGOs and consumer choices, one of which is investing. The time when issues related to global responsibility were seen simply as soft values and something separated from successful business has passed a long time ago. On the contrary, evidence shows that investing in responsible companies will boost your investing performance.

The letters ESG pop up every now and then in investment magazines, blogs, pods, as well as in KIIDs, prospectuses and different marketing materials. Letters ESG stand for Environmental, Social and Governance. In many cases, ESG also refers to sustainable or responsible investments.

Environmental, Social and Governance (ESG) criteria is a set of standards for a company’s operations which socially conscious investors use to screen investments. The criteria examine how a company performs on certain ESG criteria, such as:

• climate change
• carbon emissions
• water use
• conservation efforts
• community relationships
• human and animal rights
• employees
• suppliers
• customers
• leadership
• executive pay
• audits
• internal controls
• taxation shareholder rights
• anti-corruption and so on.

What is sustainable or responsible?

Most institutional investors, such as asset managers and fund management companies, publish their own ESG strategies. There are also some public frameworks related to ESG principles and risk management, for example the  Equator principles or UN Principles for responsible investments can be both used for reference. In any case, every investor should decide on the values to include or highlight in his/her own investment strategy.

How can I make an impact as an investor?

Listed companies have large institutional shareholders the power of influence of which is superior to that of a private investor. However, you can steer the money to companies and the companies themselves in the right direction by investing in funds managed by a fund management company that promotes the values you want to support. Whether you invest in stocks or bonds, your funds make a difference.

What does “the impact” mean in practice?

• Positive selection. This can be done either by following some defined ESG criteria, or by the best-in-class method, where the investor selects among several ESG compliant companies.
• Activism. This refers to strategic voting by shareholders in support of a particular issue, or to initiate change in the governance of the company. Moreover, an investor asking questions at the shareholders’ assembly can directly bring up issues related to company’s values. European law also requires UCITS management companies and Alternative investment fund managers to establish strategies for the exercise of voting rights. Information about such strategies, and actions taken on basis of them, shall also be available to the investors.
• Engagement and consulting. This is primarily done by institutional investors by leading constructive shareholder engagement dialogues with the managements of the companies, either separately or together with other investors.
• Exclusion. This refers to removal of certain sectors or companies from consideration for investment, based on ESG specific criteria, for instance tobacco companies, or companies using child labor.
• Integration. The inclusion of ESG risks and opportunities as additional factors in a financial analysis of a potential investment.

Where can I find information whether a company is responsible or not?

In the EU, large companies which are of public interest shall include a non-financial statement including matters concerning the environment, social and employee related matters as well as human rights, anti-corruption and bribery in their management report. Furthermore, Morningstar has a tool, which helps you understand how sustainable the companies are in a fund’s portfolio.

The European commission has also adopted an Action plan for sustainable finance to amend the Markets of Financial Instruments Directive (MiFID II) as well as the Insurance Distribution Directive (IDD) in order to oblige investment firms and insurance distributors to take the investors ESG-preferences into consideration. In the future companies will be obliged to find out their clients’ preferences (such as environmental, social and governance factors) and recommend financial instruments and services accordingly.

The ESG-criteria has also been seen as a tool for corporate risk management and productivity enhancement. This makes sense, if you think about industries complying with environment and safety requirements in order to avoid losses due to accidents and more importantly, promote wellbeing of their employees.

In many cases, money rules the world, both in good and bad ways. In other words, keep in mind that your investment decisions will also make an impact for our society, whether it impacts your investment decisions or not.

Further information:

Katja Flittner, Associate, tel. +358 50 410 0512, [email protected]