Investors in the US are starting to catch up with their European counterparts with respect to taking environmental, social and governance (ESG) principles into account.
Environmental criteria look at how a company performs as a steward of the natural environment. Social criteria examine how a company manages relationships with its employees, suppliers, customers and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder rights.
According to a recent survey, the percentage of US institutional investors who outright reject ESG shrank from 51% last year to 34% this year. In fact, 24% now say that an ESG integrated portfolio will outperform a non-ESG portfolio.
Globally, 90% of institutional investors believe that ESG integrated portfolios are likely to perform as well or better than non-ESG portfolios and 72% are already using ESG to make investment decisions. (More than half say they consider ESG integration to be part of their fiduciary duty).
ESG principles involve both negative screening – often excluding stocks of fossil fuel, alcohol, tobacco and firearms companies – as well as engaging with companies to influence corporate behavior.
At this point, the main barriers to widespread adoption of ESG are more logistical than philosophical. The growing embrace of ESG principles is not just a matter of altruism. There is a growing awareness that ESG risks can impact the worth of so-called intangible assets, which make up more than 80% of company value. Intangible assets include brand names, top managers, technological know-how, and a loyal, well-trained and engaged workforce.
Increasingly, investors don’t just want companies to do well financially, they want them to do good in the world.
Photo, posted August 18, 2014, courtesy of Christine Puccio via Flickr.