Developing the ‘S’ and ‘G’ in ESG Investing

ESG (environmental, social and governance) investing has gained momentum over the past decade, often with an extended focus on the environmental component. Investors’ rising expectations that companies uphold ESG criteria, along with new disclosure requirements, are together encouraging business leaders to make decisions and consider both people and the planet within their overall strategy. During this process, there is a growing agreement on the need for developing the social and governance components of ESG investing, according to the CEO of Lebec Consulting, Alix Lebec.

Social and governance issues still largely overlooked in ESG investing

“Investment decisions should be driven by proactive value creation, innovation and intentionality to support both people and planet. These principles, alongside durable profitability, are what we call impact investing,” Lebec told TriplePundit in an email.

Social and governance issues play a critical role in helping investors and business leaders generate long-term profits and manage risk, yet these areas are not invested in substantially. For example, funds with elements of low-carbon technologies, fossil fuel-free energy and an emphasis on environment stewardship have a higher inflow than funds that have more of a focus on issues such as community development, gender equality, and racial and ethnic diversity.

When identifying metrics and measuring impact, environmental funds and products are easily more quantifiable than social- and governance- related financial products. Measuring the principles of labor relations, diversity and inclusion, and corporate culture is complex due to their definitions and criterion. However, ESG issues are intertwined. For example, climate change-induced events disproportionately affect impoverished communities and exacerbate existing educational, gender and health inequalities. And as ESG is linked to higher ROI and reduction in risk, all three components create equal value which investors mustn’t ignore.

ESG issues are resolved concurrently

Regarding social and governance issues, Lebec explained to 3p the connection between equity and inclusion and ESG investing in relation to the United Nationals Sustainable Development Goals (SDGs).

"While some of these factors — for example, SDG 5 [Gender Equality] and SDG 10 [Reduced Inequalities] — are perfectly clear, the reality is that equity and inclusion policies have trickle-down effects which touch every single one of these factors. And these are all very much a part of ESG,” Lebec said.

More specifically, Lebec explained that such SDGs goals that are centered around alleviating poverty or achieving gender equality cannot be achieved without achieving Clean Water and Sanitation (SDG 6). And this is because in emerging global markets, women and girls are often reminded about how they are marginalized, such as when they travel on foot to collect water from distant areas. According to Lebec, since millions of people do not have access to this necessary resource, a gender equality gap is created instantaneously that hinders girls from the educational system and workforce.

When taking into account this connection, investors need an all-encompassing view of how the companies they support are serving society. And then, conscious decisions can be made.

How to invest consciously

Growing evidence suggests that a majority of corporate executive leadership is on board to focus on ESG. According to a recent survey of chief executives, coming after increased political intervention in markets, the second largest risk to future growth strategies is the acceleration of climate change paired with the mounting pressure to enact a sustainability plan.

Lebec explained to 3p a few strategies for how brands and companies can invest authentically to create impact. The first is being investing in solutions that are both reducing climate change impact and granting access to essentials to new consumers and impoverished communities.

Secondly, Lebec explained that companies should become familiar with the financial tools and models used by practitioners to solve current issues. This would pan out as partnerships with investment managers and nonprofit organizations. In addition to this, companies must redefine corporate sustainability successes through methods which amalgamate philanthropy, impact investing, ESG and financial tools. Lastly, Lebec advocated for applying and building a "portfolio approach," as this will help brands and companies diversify risk and invest abundantly.

Integrating ethical and social values in investment portfolios is a win-win for investors and all stakeholders. And maximizing positive impact and profitability will come from further defining ESG investing as a decision that also values diversity, equity, and inclusion factors.

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