‘Responsible investing’ is an umbrella term used to describe the broad range of approaches that can be used to incorporate ESG considerations into the investment process. A decade ago there was prevailing skepticism in the investment community about the impact these non-financial factors might have on prices for equities or bonds. Today, however, investors and market observers have begun to realize the value and importance of ESG factors.
At RBC Global Asset Management (RBC GAM), we believe proper disclosure and consideration of ESG risks and opportunities by the companies we invest in is critical to strengthening the overall performance of our portfolios. We integrate all relevant ESG factors into our investment process. When organizations provide ESG disclosures and we examine them, it ensures our investors get better insights into a company’s make-up.
In addition, good corporate governance of ESG factors can increasingly drive product sales and recruiting success, driven largely by a new generation that wants to work for and do business with companies that align with their personal values.
For business leaders still seeking a better understanding of how responsible investing works and why they should consider incorporating ESG into their strategic thinking, here are three factors to consider:
1. Responsible investing improves financial performance
Integrated ESG refers manager’s incorporation of non-financial ESG factors – such as climate-change readiness, working conditions or board diversity – into fundamental research so they can identify risks and opportunities that would otherwise be overlooked.
Each factor has the potential to present a risk and opportunity for every company. In examining ESG factors, those managers apply a more expansive lens – not a negative screen – when reviewing a company’s fit for their portfolios. Essentially, integrating ESG into the decision-making process gives investment managers a deeper understanding of companies. It provides insight into how the companies will perform and the value they may add to a portfolio.
According to a study conducted by Ocean Tomo, the financial value of tangible versus intangible assets has completely reversed over the last 40 years. In 1975 tangible assets comprised 83 percent of the S&P 500’s market value; in 2015, intangible assets made up 84 percent of that index’s market value.
Similarly, intangible factors such as supply chain risk, cyber-security risk and climate-transition readiness have been shown over time to have an impact on a company’s financial performance, according to Cyber Security Hub.
Extra-financial outputs such as employee satisfaction are now are being viewed as significant contributors to a company’s financial results, just as intangible assets including intellectual property have become crucial line items on the balance sheet.
2. Companies that care about ESG retain top young talent
A company with an active ESG program can attract younger employees who are seeking jobs with companies that share their values. Diversity and inclusion should be top of mind for all executives and corporate boards. Many studies and research surveys indicate that diverse teams perform better. Also, the composition of management and boards should reflect their employees, shareholders and customers.
Women hold 60 percent of US wealth, make 70 percent of the purchasing decisions and represent a significant percentage of every company’s employees. Their absence at the highest levels of corporations will give ESG investors pause because it indicates a company will struggle to connect with crucial stakeholders.
More and more employees, and particularly millennials, care deeply that the companies they work for embrace values aligned with their own. Most millennials would take a pay cut to work at an environmentally responsible company, according to a survey of 1,000 employees at large US companies commissioned by Swych. More than 70 percent of the survey respondents in every age group say they are more likely to choose to work at a company with a robust environmental agenda.
Employees who are passionate about the organizations they work at are likely to work harder and stay longer. And recent studies show that happier employees are more innovative employees. Of the employees in BI Worldwide’s latest research, 82 percent say being happy at work brings out their best ideas. Data also shows that employees are more satisfied when they believe in the social impact of their companies.
3. Sustainability practices help companies stand out from the competition
Customers today understand that they have power, and customers consider the sustainability aspects of the products they are buying when making purchasing decisions.
According to Forbes, twice as many companies had full-time sustainability officers in 2003 as in 1995, and that number doubled again between 2003 and 2008. That’s because customers care about ESG, making it good business for management to care as well. Business managers need to actively seek out and analyze how their competitors address their ESG risks and opportunities for much the same reason they monitor competitors’ financial and marketing efforts.
There is ample data to prove that a robust ESG program delivers significant benefits to a company’s bottom line. It opens up access to large pools of capital, supports recruiting and retention efforts and drives customer acquisition and loyalty.
By understanding the ESG risks and opportunities their companies face, business leaders are better equipped to address them. It’s a new perspective for many corporations, but a powerful analytical tool. And it is why asset managers seeking long-term, sustainable performance from their investments include ESG considerations as part of the fundamental analysis of a company.
Catherine Banat is director of US responsible investing for RBC GAM