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Thank you, Mr Spiller, Now we Have ESG

From small beginnings, responsible investment has become pro-active around three key points, writes Martin Hawes.

27 May 2024

Rodger Spiller was undoubtedly the father of Socially Responsible Investing (SRI) in New Zealand.

For decades he banged away at the topic. Back in the 1990s he was way ahead of his time and although he got some publicity, he was pretty much a lone voice.

Back in those days SRI was almost completely about what you would exclude from a portfolio ... you didn’t want to own sin stocks (things like gambling, land mines, tobacco and nuclear weapons).

The basic idea was (and still is) that investors exclude these sinful things partly as a matter of conscience, and partly to help starve these companies of capital.

SRI probably had less impact than we would have liked; it was adopted by few and lacked momentum. However, the mood has changed in the last decade. Today most people will not tolerate their money invested in the companies that do harm and, just as important, they want to invest in companies that do good.

Avoiding sin stocks is a given. People are now more concerned with what they will include in their portfolios. They want to ensure that what they own fits into the green economy that companies look after their people, and that they are well governed.

So, now we talk about ESG (Environment, Social, Governance) investing. This is far more about what we include in a portfolio. We want investments that are likely to be sustainable and therefore we should buy companies that are kind to the environment, fit in well with society and have diverse governance. It makes sense to look at investment through an ESG lens.

Environment

A company that is kind on the environment, that contributes little to climate change, that uses minimal plastic, water or fossil fuels is likely to have a better reputation and thrive.

Even better is one that actively assists to improve the environment or the climate – for example, there are companies involved in direct carbon capture which are looking for ways to strip carbon from the atmosphere and would, if successful, make very good investments.

If an investment you are considering cares for the environment and climate issues it’s likely to be more profitable and last longer than others.

Social

This measure is about how a company treats people – internally and externally. This means investors considering how a company deals with its staff and interacts with the community. A company that treats its people well can win the war for talent. That is good business, and such companies are likely to be more sustainable and profitable.

Governance

This mostly concerns the board of the company. Is the board comprised of a diverse bunch of people? Or is it some old cronies who all have much the same life experience and think the same.

Many boards in the past were like this. Such businesses may sell to a diverse range of customers, but their boards had little insight into how customers think and feel. A company with a diverse board is likely to understand its customers and its staff better and, as such, make good investments.

ESG analysis considers whether a business will survive and thrive in the long term. The zeitgeist comes and goes; companies may blossom or wither according to whether they can stay with trends and what is happening in the world.

If you think about it, you would like your investments to have strong ESG attributes: you want them to use the environment and resources well, you want them to care for people (customers and staff) and want them to have good governance that is in touch with diverse markets and avoids “groupthink”. These are just the kind of things that make companies great.

The economic, political and social climate also makes a big difference to companies. People with investment capital respond to what is going on very quickly. If a company cannot keep up with the way people are thinking and feeling, it’s toast.

ESG analysis is now in the mainstream and widely used and there are many analysts who give investments an ESG score for
quick assessment. This is very powerful. If people can quickly see it has a low ESG score it will not attract investment, its share price will be lower and its cost of capital higher.

Climate change and other environmental problems will not be much solved by a few individuals using their cars less or going off-grid. The real progress is when there are changes at a political or systemic level, so changes are wrought at scale.

Today, nearly every managed fund has an ESG policy, and many companies would get high ESG scores. It was not like that in the olden days. Thankfully, we have moved on, which should give us all some hope.

Martin Hawes is a financial author and speaker. He is not a financial advice provider nor a financial adviser. The information contained in this article is general in nature and is not intended to be financial advice. Before making any financial decisions, you should consult a professional financial adviser. Nothing in this article is, or should be taken as, an offer, invitation or recommendation to buy, sell or retain a regulated financial product.

Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.

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