What is an ESG investment?

| Illustration by Alice Wright
 

First of all, ESG stands for Environment, Social, and Governance – three factors that are considered in making sustainable investments. Before we get into the detail of analysing these factors, let’s go back up a few levels and think about what makes a sustainable investment.

Blue Oceans Capital specialises in making ESG investments. Find out more about ESG investing and the companies we’re part-owners of.

When we mention sustainable investing many people think this will only relate to industries such as renewable energy and electric cars. Sustainability spans a much wider arena than this. At the highest level it means a company that minimises harm. At the next level down, it means a preference for business models that go further than minimising harm and actually exist to provide solutions or substitutes to actions causing harm. This can encompass a broad array of business models. For example, artificial intelligence is creating enormous value by increasing productivity, lessening the demand for environmental resources, while, in many cases, reducing pollution and solving social issues. Sustainability is about businesses that can be sustained. With that in mind, let’s go down to the detail of analysing business models through an ESG lens.

The table below highlights 10 important factors related to ESG concerns.

Environmental (E) Social (S) Governance (G)
Carbon emissions Controversial business Executive compensation
Climate change risks Community relations Accountability
Supply chain management Customer relations/product Board structure/size
Waste and recycling Diversity issues CEO duality
Raw material sourcing Employee relations Ownership structure
Biodiversity/land use Responsible marketing and R&D Transparency
Water management Union relationships Voting procedures
Energy usage Human rights Shareholder rights
Regulatory/legal risks Human capital management Anti-takeover measures
Weather events Health and safety Bribery and corruption

Table 1. Ten important ESG factors. Source: Clarke, Feiner & Viehs, 2015.

Here we can see environmental issues centering around reducing emissions whilst conserving water usage, essentially reducing waste. Social issues focus mainly on providing products and services in a way the community is happy with, while providing employees an engaging and safe workplace that welcomes their diversity. Governance issues, while the blandest of sustainable factors, are very important. Governance sets the sustainable agenda that is enacted through environmental and social initiatives. Good governance is responsible. Companies making responsible decisions have a better chance of enduring over the long-term. Being sustained by responsible actions they are sustainable.

Implications

At Blue Oceans Capital we view businesses as enablers of evolution. For evolution to be sustained it must be beneficial to both the organism and its surrounding environment on which it depends. When looking at a business for the first time under a sustainability lens, first consider if this business acts for the benefit of society or to its detriment? Does its actions cause harm to the environment or society? At Blue Oceans we have chosen to rule out some industries altogether, including polluting commodities, weapons or defence, gambling, alcohol and tobacco and any media that is harmful to psychological wellbeing. After those high-level considerations, you need to move deeper using an ESG lens, and consider factors such as those in the table above. No company is perfect. The more granular your research goes, the more ESG concerns you will uncover. Commerce must carry on even if its not perfect; what we are looking for is those operations making the best effort given limitations of resources and technology.

References

Clarke, GL., Feiner, A., Viehs, M. 2015. “From the stockholder to the stakeholder” University of Oxford.

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