Companies are also adopting sophisticated ESG practices as a critical part of risk management and as a means to differentiate their business with both investors and consumers. An increasing number of asset managers are offering ESG funds and, at times, noting performance better than traditional benchmarks.
What is ESG? A variety of terms are used to refer to ESG, including responsible investing or sustainability. Regardless of the nomenclature, ESG generally regards the concept that long-term value is created by companies that embed ESG issues into their strategy. A number of organizations and initiatives are promoting the widespread adoption of ESG factors, including the Principles for Responsible Investment (PRI), which supports a global network of over 2,000 signatories to incorporate ESG factors into their investment and ownership decisions. These signatories include some of the world’s most influential asset owners, investments managers and service providers, including CPPIB and BlackRock. The Sustainability Accounting Standards Board (SASB) recently released the first industry-specific sustainability accounting standards defining ESG factors most likely to have a material financial impact on a company. Well known corporations including Nike, Kellogg’s, CBRE and Diageo use the SASB standards. Among institutional investors, Norges Bank Investment Management is at the forefront of ESG issues and excludes companies it views as not ESG-compliant from the fund’s investment universe. It places other companies on an observation list. These lists are public and are based on guidelines adopted in 2014. Other institutional investors have also taken public positions on ESG, most recently the Ireland Strategic Investment Fund (ISIF), which announced it is integrating ESG factors into its Irish portfolio.
While investors and executives may emphasize different ESG factors depending on geography, industry or investment perspective, there are common ESG factors. They include:
Environmental — Climate change risks and opportunities — Waste and water management — Workplace diversity and inclusion
Social — Human rights — Employee health, safety and wellbeing — Labor practices and talent management
Governance — Executive compensation — Political contributions — Board independence, composition and renewal
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