While the E in ESG moved into the global spotlight in 2019, when Greta Thunberg became the face of “Fridays for Future”, demanding – together with other climate change activists such as “Extinction Rebellion” – immediate action to prevent the consequences of global warming and climate change, the shock and the dramatic consequences of the COVID-19 pandemic has thrown the S in ESG into sharp relief, reinvigorating the debate about corporate purpose: Do companies solely exist to maximise profits and shareholder value? Should they serve society in other ways than solely paying taxes? How do they care for their employees during such a crisis – are they willing/should they be willing to take on additional responsibilities to look after their staff?
Investors sentiment very much reflect the public sentiment: In a recent study 70% of 23,000 private investors surveyed globally said that a company’s impact on communities and society is ‘very important’ to them, and nearly the same number, 67%, said they expect companies to pay attention to environmental issues.
The G aspect of ESG often appears to fade into the background in the public coverage of ESG, but there’s consensus that good corporate governance is essential to yield corporate returns and that “E” and “S” don’t hold much without effective governance.
Research suggests that asset owners in the earlier stages of ESG adoption are more likely to have an initial focus on governance factors, but as investors grow in sophistication, environmental factors start to take precedence in their portfolios.
The varying emphasis on either E, S or G factors seems to also depend on the origin of the investors: while climate change and environmental sustainability are the focus of European and North American investors, asset owners in the Asia-Pacific (APAC) region rank corporate governance ahead of environmental sustainability – one reason being that APAC investors often have large exposures to emerging Asian markets where disclosure and corporate governance standards are generally less developed than in Europe and North America.
Meanwhile, investors across all regions face a dilemma with regards to social issues, which feature – as outlined earlier – as high as environmental factors. However, there’s a dearth of reliable metrics and viable investment products, but the public debate about corporate responsibilities during and post the COVID-19 pandemic, which resulted in a rise in social bonds issuance in 2020, has emphasised the need to more urgently develop solutions for the reporting of social impact.
Corporate clients who would like to discuss this topic further should contact: Dr Arthur Krebbers, Head of Sustainable Finance, Corporates; or Varun Sarda, Head of ESG Advisory.