On Thursday 12 November 2020, Fulcrum and communications consultancy Camarco hosted a virtual ESG roundtable which examined the increased focus on environmental, social and governance considerations (“ESG”). Panelists Sarah Gordon (CEO and co-founder of risk management consultancy Satarla), Guy Ellison (head of UK equities at Investec) and Fulcrum respectively provided insights from a corporate, investment and governance perspective, the key takeaways from which are below.
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Owing to the ever-intensifying spotlight on topics such as sustainability and ESG, what was historically viewed perhaps as a peripheral box-ticking exercise has now firmly taken up residence in the mainstream.
The ESG sector is growing exponentially: one-quarter of all investable assets globally (worth approximately US$31trillion) are now being managed with some sort of ESG mandate. With that in mind, our panel considered the implications from a corporate, investment and governance perspective.
ESG: the corporate perspective
ESG is a rare type of mandate in that it is entirely sector agnostic – it is something that needs to be enshrined as a consideration irrespective of a corporate’s industry. There is a balancing point to be struck between making money and doing so responsibly. Historically, the former has taken precedence in decision making, but with the increased focus on ESG in recent years, the scales are tipping the other way; it is becoming more rewarding to make money in a sustainable manner than to purely prioritise the bottom line.
There are also now modes of valuing areas of sustainability that we didn’t have in the past. When insufficient ESG consideration has led to very public instances of ‘getting it wrong’, the ramifications have moved beyond the arguably tokenistic gesture of the CEO losing their job. Instead, we’ve now seen several high-profile cases which have demonstrated that consequences can quickly become much more wide-reaching: from several senior leaders losing their jobs instead of one, through to a company’s share price dropping through the floor. This culture change goes to show it is well worth corporates getting it right, and starting that work yesterday.
ESG: the investment perspective
Investment managers have always had a fiduciary responsibility to act in a client’s interest. Their activity has, however, changed quite dramatically over the last five years in two ways in particular: the remit of the investor analysis, and also the frequency of touch-points engaged within an organisation. This is due in a large part to a better informed, more socially engaged client base.
To first look at the investor analysis remit, engagement with management teams has expanded beyond the conventional financial analysis to include social responsibility considerations, with equal equity often given to each. In terms of the diversification of client touch-points, investors have found they are now engaging with a much broader base of contacts within a company, beyond the traditional C-suite interaction to other managers along the chain, and even as far as having ESG conversations with a company’s chairperson.
A challenge for investment managers is to quantifiably assess the value proposition of ESG practices, as so much of the time they are qualitative in nature. Moreover, the increased ESG focus has only gathered momentum in the relatively recent past, which makes it harder to produce well-established metrics to benchmark against. What we increasingly do have, however, are the precedents set by those who have got it badly wrong.
ESG: the governance perspective
There is a clear link between poor corporate governance and poor corporate behaviour. Not only does poor governance create an opportunity for bad behaviour, in the worst cases, it even helps foster a culture for it. That said, one does not always follow the other: there are cases where a company might be behind the curve in terms of establishing good corporate governance, but given corporate behaviour is down to individuals, a strong (albeit ungoverned) culture can, to a certain extent, keep bad behaviour at bay.
However, bad corporate behaviour is almost always indicative of poor governance, which various high-profile cases have proven is incredibly damaging reputationally. The knock on effect of a reputational hit is now much harder to rehabilitate: given the evolved focus on ESG for investors, any company that falls afoul of poor corporate governance, and in turn, behaviour, faces the very real possibility that their share prices will fall through the floor.
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