ESG: It’s More Than An Abbreviation And Why That Matters
Environmental, Social and Governance factors are becoming increasingly important for companies, investors and stakeholders, but sometimes it can be hard to see the wood for the trees. Our Journey to Excellence expert, Mark Lister, Investment Director at Craigs Investment Partners talks us through the ABCs of ESG and why it is important to take a nuanced approach to the metrics.
How do you describe what you do for a job at a dinner party?
I help people make sensible financial decisions.
Environmental, Social and Governance seem to be often lumped into an abbreviation, but at Craigs Investment Partners you have really focused on understanding these as separate metrics within a company’s performance. Why is this important?
We’re not about one size fits all solutions. Our investment portfolios have always been tailored to the individual client’s needs, rather than putting them in box A, B, C or D. We took the same approach when putting together a sustainability product because everyone has their own personal thoughts on whether the E, the S or the G is most important, and why.
What trends have you noticed so far with an understanding of these different metrics? Do New Zealand companies have an initial bias towards one particular area?
From companies themselves, the E has been the area of most focus, especially with the way the regulatory environment is headed. However, the S and the G are becoming increasingly relevant, particularly when it comes to diversity across staff and suppliers, leadership groups and Boards.
Do investors have an initial bias towards a particular area?
Generally, I think it’s the E that is has been of most interest to people, and this is probably why companies have focused on this area too. New Zealanders have always been environmentally minded, and concern over climate change has reinforced that passion. However, investors are very interested in many other aspects of the sustainability landscape too, and everyone has their own personal view about which areas are most important and why.
Is there a particular industry that is doing well across the board?
Technology companies tend to score well on an ESG basis, and a lot of companies we have looked at in this sector (especially international companies) are going the extra mile by doing things like auditing their suppliers, and instilling ethnic diversity targets and supply chain emission reduction targets.
In times when the market might lose some of its buoyancy, how are ethical investing mandates influenced?
Because ESG investors have a narrower universe of companies to choose from, there is always the risk they perform badly at times. In 2022, energy and commodity companies have been some of the best performers, so an ESG investor that chose not to invest in those sectors would be missing out on those gains. As with any investment strategy, there will be times when the economic environment isn’t favourable, so all one can do is stick to one’s strategy and focus on the long-term.
ESG might be of growing importance for investors because of ethical reasons, but are you able to draw on any data which shows an increase in the financial performance of companies because of a shift in ESG focus?
It’s difficult to pin down the specific, especially with ESG investing being a strategy that we expect to deliver gains over the long-term, rather than during shorter periods. The last six months have been unique, and very volatile, which makes for difficult comparisons. However, some of the ETFs that screen for specific ESG-related metrics have indeed suggested that focusing on sustainability can indeed improve long-term returns.
How has your work influenced your personal life decision making, particularly when it comes to companies and their ESG metrics?
Like many consumers, I’ve always supported the companies that I’ve perceived to be playing the long game and focusing on looking after their customers and staff, rather than simply chasing short-term wins. However, being exposed to the sustainability work our firm has invested in adds another dimension to some of those decisions we make as consumers.
What advice would you have for employees who want to implement more ESG within their workplaces but are going up against inertia from above?
Evidence of what there is to be gained tends to work with management teams, so I would suggest trying to educate and inform the decision-makers within a firm about the potential benefits of taking a more sustainable approach. Maybe it’s increased productivity, lower staff turnover, higher morale or an improved reputation with customers or potential customers. Nobody wants policies for the sake of policies, but I think most businesses would be happy to invest in change if they could see the potential benefit which will flow from those initiatives.
Craigs Investment Partners Limited is a NZX Participant firm. The Craigs Investment Partners Limited Financial Advice Provider Disclosure Statement can be viewed at craigsip.com/tcs. Please visit craigsip.com. This information is general in nature and does not constitute regulated financial advice. It does not take into account your particular financial situation, objectives, goals, or risk tolerance. Investments are subject to risk and are not guaranteed. Past returns are no guarantee of future performance and returns can go down as well as up. Before making investment decisions we recommend you contact an investment adviser.
Published 7th July 2022.
