How ESG Can Benefit The World and Your Pocket

This month’s article was inspired by a bottle of Bali wine. That doesn’t mean great ideas came into my head after demolishing the bottle. Whereas my erstwhile compatriot Dylan Thomas (‘Under Milk Wood’ and others) required a few bottles of plonk to inspire his famous poems the same would just send me to sleep. No, the idea for the article came to me when actually buying the bottle.

How come? On a recent trip to Bali I thought I would take a bottle of Bali wine back with me as Bali wines are a rarity in Jakarta. Hotels, shops and restaurants clearly prefer to sell the imported products with their inflated prices and import taxes. I chose the bottle, paid my money and the cashier said thank you. I waited a little and then asked if she could put it in a bag for me. She said single-use plastic bags could not be used any longer in Bali. I asked if I could buy a more permanent one. ‘Sorry, we don’t sell them’ was the answer. So I had to walk to my hotel with bottle in hand, conscious that some people might think I needed to drink ‘on the go’.

Looking on the positive side, I realised this was a case of the Bali authorities showing great leadership and an example to the world (including Jakarta) as it drowns in its own waste. It was an example of ESG, three letters you are likely to hear more frequently in the future.

What exactly is ESG?

It stands for Environmental, Social and Governance. It embraces other terminology such as ethical and sustainability. Climate change is also another critical factor. The Wikipedia definition is as follows: 

‘Environmental, Social and Governance (ESG) refers to the three central factors in measuring the sustainability and ethical impact of an investment in a company or business. These criteria help to determine the future financial performance of companies.’

It is not really a new theme but it has evolved from being simply a worthy cause to a set of ideals that are now perceived as essential to save the planet for future generations. In the field of finance so-called ‘ethical’  funds have been around for decades. From time to time I recall potential investors asking if I knew of any such funds. I did of course but interest waned when I compared their performance with that of conventional funds.

How to make a fund ‘ethical’

One simple strategy was to apply ‘negative screening’ and avoid investing in companies that invested for example in any of the following:

• Alcohol

• Tobacco

• Gambling

• Pornography

• Armaments

• Nuclear power

• Fossil fuels

• Fur trade

• Modern slavery

• Child labour

• Charging high interest rates

• Deforestation

The list could go on and on. It is worthy of note that so-called ‘sharia’ funds follow very much the same principles of responsible investing.

Looking at the list however it is easy to see how the performance of a fund could suffer if you strictly follow the ‘negative’ list. You would be cutting out not just the makers of alcoholic beverages worldwide but also companies that make weapons to defend your own country, oil companies, garment companies (who manufacture in developing countries), banks (credit card rates are unquestionably high) and many other companies that generate high returns for investors.

So what has changed?

It is clear that you cannot separate companies into ‘black and white’ or ‘good and bad’. While some oil companies continue to focus on extracting to the last drop of oil that took millions of years to evolve into its present form, others are now investing heavily in renewable forms of energy such as geothermal, solar, and wind.

What about tobacco, surely an unforgiveable industry? But in Indonesia it employs hundreds of thousands of people. What would happen to them if tobacco was outlawed overnight? But those companies also have an opportunity to seek alternative products that would be less harmful and would sustain employment.  And if they did so they should be given credit. Furniture and other companies that are responsible for deforestation could turn to more sustainable products such as bamboo.

So if we are not labelling companies ‘black’ or ‘white’ clearly they are some shade of gray. Fortunately there are now a number of rating companies that allocate points to this degree of ‘gray’ and the allocations will change as companies become more and more responsible and sustainable. This is still work in progress.

Social and Governance go much further

ESG now embraces the way companies are run. Do they respect human rights, equal pay, minorities, the views of shareholders etc.?

In recent years many large companies, including banks, have been heavily punished for wrongdoing ranging from money laundering to major oil spills. A lot of legislation is now in place to ensure better governance. But still we hear of scandals such as large company failures combined with huge bonuses being paid to the executives of those companies that failed. British Home Stores and last month’s collapse of the 150-year old travel company Thomas Cook in the UK come to mind. So there is still a long way to  go before the culture of industry attains a standard of high ethics. In the meantime it is up to shareholders and the public at large to press for further improvements.

But whether or not companies improve their ESG ratings unilaterally they will have little choice if they hope to survive. Surveys are indicating a rapid increase in awareness by the public, particularly among Millennials and females. Statistics are now pointing to the fact that companies with good sustainability standards are now more profitable than those without. Investors are starting to punish companies that will not fall into line.

So what can you do personally to help raise ESG standards?

A lot depends on your job, whether you are the member         of a private pension scheme or a charitable organisation. Or just an individual prepared to speak out.

Here are a few practical suggestions:

• Don’t hesitate to write to leaders in your country on ESG issues.

• Support and vote for parties that take ESG seriously.

• If you are a member of a company pension scheme ask the Trustees what is their policy towards ethical investing.

• If you are a member of a charitable organisation have a say in where and how funds are invested and distributed.

• If you own a business assess how it stands up to the demands of ESG.

• If you are a company employee see how it measures in terms of ESG and don’t be afraid to make suggestions on improving it.

• If you are a shareholder of a company attend shareholder meetings and press for high standards of governance.

• Look at your own portfolio of investments; see if you can work sustainable funds into at least part of it. Performance will probably improve and you will feel better about your revised holdings.

As for me, I will ensure I pack a shopping bag for my next trip to Bali.

Colin Bloodworth, Chartered Member of   the Chartered Institute for

Securities and Investment (UK), has spent over 20 years in Indonesia.

He is based in Jakarta but visits Bali regularly.

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Copyright © 2019 Colin Bloodworth