When ethical behaviour sits comfortably alongside financial performance

ESG may sound like just another TLA (that’s three letter acronym) but it’s one that’s making quite a noise on the corporate governance landscape. And it’s poised to get a whole lot louder in the months ahead.

So listen up…

ESG, of course, stands for environment, social and governance…and the good news is it is requiring boards – particularly those in trustee positions – to shift their thinking from bottom line to triple bottom line.

Right now, the focus is very much on super fund boards and others whose primary purpose is to be prudent when investing others’ hard-earned.

But more than just achieving an acceptable return on investment, these directors are increasingly being called upon to consider a raft of environmental and social issues. They need to look into the behavior of the companies they plan to invest in and satisfy themselves that these organisations are also ethical.

In short, they need to place ethical behaviour on a par with financial performance.

The shift, like most corporate conversions, has been driven largely by changes in societal thinking over the past decade or so. Now, these softer, ethical components are being reflected in annual reports and company codes.

And the message for directors is clear: get serious about and on top of ESG or you’ll find it difficult to attract funds. That’s because we’re fast moving from an “it’s okay and quite cool to consider ESG issues” to and “it’s our duty to do so in certain circumstances” position.

If in any doubt, consider a few recent developments abroad and at home…

In the UK and USA, trustee directors are now expected to take ESG into account if the issues have a financially material bearing on the investments. It’s not a leap of logic of Olympian proportions to conclude that we can’t assume there won’t be a material bearing…perhaps not tomorrow, but what about a few years hence?

And as trustees are there to look after the longer term interests, there’s a compelling argument that ESG is mandatory in all their investments.

Then there’s the UN-supported Principles for Responsible Investment (PRI) initiative working to put responsible investment into practice, its goal being to highlight the implications of sustainability for investors and encourage signatories to incorporate these issues in their investment decision-making and ownership practices.

Closer to home, when the Fraser Review looked into governance best practice in not-for-profit super funds, PRI put in a submission, arguing that any best practice code should include ESG factors in the investment process and calling on super funds to disclose to members how they’re doing in this regard.

When this happens, the snowball will roll. The super funds will look very closely at the ESG credentials of companies they’re thinking of investing in and the lemming effect will doubtless ensure it filters down and infiltrates all organisations.

Even the accounting profession, who you’ll recall from an earlier blog are gearing up to bring diversity to their auditing divisions by complementing the traditional auditors with those who have ‘softer’ skills and can think beyond the numbers and delve into areas such as ESG.

Until next time,

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