Surely you have already heard about socially responsible investing. The demand for investments that are more sustainable began at the end of the last century and the adaptation of companies to this concept is constantly evolving.

Socially responsible investing is an investment discipline that takes into account criteria based on environmental and social sustainability and good corporate governance (ESG criteria, after its acronym in English, Environmental, Social, and Governance).

Historically, investors have relied on analysing a company’s essential aspects using ‘traditional’ methods when estimating the long-term value of a company, these being: estimates of income, costs, indebtedness, etc. However, with increasing intensity, new metrics are being incorporated to assess the good performance of companies and their long-term value.

ESG metrics

ESG criteria cover a variety of issues: firstly those regarding the care of the environment by the analysed company (greenhouse gas emissions, waste treatment, pollution, etc.). Secondly, those of a social nature, which value how the company treats people (employee working conditions, diversity and equal opportunities, treatment of suppliers, clients, etc.).

And lastly, corporate governance criteria are incorporated, which analyse the management of the company (transparency, composition of the board of directors, policies to control corruption and bad practices, tax strategies, remuneration of executives, etc.).

The principles

Since the end of the 90s, there has been an increase in the voices that believe it is necessary to incorporate sustainability metrics in the analysis and not only include factors related to profits to value a company.

1999 saw the creation of the first world index built using sustainability criteria: the Dow Jones Sustainability Index. Its launch was a big step in the field of sustainable investment. This approach has evolved into the current concept of ESG, which represents the cornerstone of sustainable and responsible investing.

Nowadays

However, there is still a great deal ambiguity as to what is exactly meant by ESG and how investors can collect relevant ESG data and incorporate it into their investment decision-making process. In this sense, it is expected that during the coming years there will be significant advances and a greater alignment in ESG analysis methodologies, given the huge strategic importance that these factors are acquiring in the decision-making processes of many investors.

Additionally, ESG investment is based on the belief that the companies more likely to be successful in the long term and generate greater returns for the investor are those that care about their customers, their employees, their suppliers, and society in general, as well as the environment. In this way, the ESG concept focuses on analysing the company’s contribution to society and trying to assess how this affects its current and future results.

ESG investing is also used as a risk metric, as companies that do not meet its criteria could be excluded from important benchmark indices, or from the investment universe of many entities, which could significantly limit their access to markets, reducing their liquidity and increasing financing costs.

And this is without taking into account the important reputational risks associated with bad business practices in a setting such as the present, in a society that increasingly demands that companies be sustainable, as well as responsible with people and their environment.

 

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