As we meet more people around Australia, a common trait and questions continue to be raised around the ability to invest more sustainably and ethically particularly in regards to climate change. This is a theme that has been growing exponentially at the institutional level, but limited coverage or options have been made available for most investors. Given the plethora of acronyms already in the industry, we thought it appropriate to provide a short summary of how people can invest more sustainably through a concept called ESG. Put simply, ESG stands for Environmental, Social and Governance criteria when it comes to investing. There are many ways to apply ESG principles, which we will discuss in future issues, however, at this point we just wanted to provide an introduction to the sector.
Environmental considerations refer to investing in businesses who are stewards of nature. This may sound a little green, however, in this criteria you are either looking at companies who are aware and managing their energy use, waste, pollution and are actively involved in natural resource conservative in some way within their businesses. Most importantly, businesses must be aware of the environment risks that they are exposed to and have a policy of how to manage those risks including contaminated land, climate change and emissions.
Social considerations are becoming increasingly important in our globalised world, as after years of exporting jobs to access cheaper labour, they are now moving home or into frontier markets. The social considerations refer to relationships with employees, customers, suppliers and communities. The key exposures relate to understanding the supply chain of products being manufactured, avoiding cheap and child labour, donating a portion of profits, allowing employees time to volunteer and offer strong working conditions. A movement called B Corporations is quickly gaining steam in the country, as it requires members to consider all stakeholders in running their business. Wattle Partners has been one of the few financial advisers in the country that is an accredited BCorp.
In recent months, with the likes of Woolworth’s underpayment scandal and Westpac’s Anti Money Laundering issues, Governance has become an increasingly important question. This begins at the top, focusing on the leadership of businesses, appropriateness of executive pay, quality of external audits and internal controls (including whistle-blower policies) and protecting shareholder rights. This extends to maintaining accurate and transparent records, allowing shareholders to vote on important issues and disclosing the conflicts of interest or any board members.
Each of these criteria can be applied on a positive or negative basis, which we will discuss in future issues.