The idea that companies that are rated high on a myriad of ESG metrics will deliver superior investment returns has long lost its currency. The key issue now is how far ESG considerations are pertinent to a company’s business performance.
Materiality, as an investment concept, has thus come to the fore with the rapid rise in global assets flowing into ESG investing over the past three years.
This is because robust templates, consistent definitions and reliable data are still evolving. As a result, institutional investors are now treating engagement with their investee companies as a catalyst for change on the ground.
Hitherto, engagement was often merely a tick-box exercise for compliance experts. However, two high-profile corporate disasters in the US in this decade have proved a turning point: BP’s Deep Horizon oil spill in the Gulf of Mexico in 2010 and Volkswagen’s emission-cheating scandal in 2014.
In both cases, their shareholders were branded as financial bandits with no regard for their social or ethical responsibilities. They were deemed to have failed to exercise their ‘duty of care’ in minimising negative externalities that often result from day-to-day corporate activities that inflict uncompensated costs on wider society, while also exposing wrong-doers to existential risks.
The emerging model of engagement seeks to future-proof investee companies by identifying and mitigating all manner of risks – especially sustainability risks. The new model relies on a year-round dialogue with investee companies beyond shareholder meetings on issues that impact on long-term value creation.
Specifically, engagement seeks to re-emphasise the core purpose of financial markets in channelling capital to growing businesses and ensuring that their operations impose least harm on the environment.
The key aim is to deliver businesses of enduring value – for their shareholders, employees and society.
More information can be found in my article in today’s FTfm (9th December 2019).