Environmental, social and governance risks are known to have potential impacts on financial returns. For instance climate change presents a cost in the form of carbon emissions and also presents a governance risk if a company is not doing anything to address that risk. Environmental and social risks are often an indicator of the quality of management and board governance.
It is important to shareholders that companies are governed in a way that will enable the protection and growth of shareholder value. Governance impacts not only the relationships between investors, directors and company management but also the way in which companies manage the license to operate given by society.
Investors need to understand how to analyse ESG risks to properly factor them into the analytics and financial models. These are often referred to as intangible factors and can make up up to 75% of impacts on financial returns.
The increase in focus on ESG or responsible investment can largely be attributed to the UN initiative called the Principles for Responsible Investment or PRI – a global framework of six commitments that guide investors in looking at ESG and has the support of organisations managing some US$59 trillion in global investments.
Suzanne Ridding has had hands on experience as the Sustainability Manager at StatewideSuper – recognised as a leader in sustainable super by Super Ratings three years in a row.
Super funds – understand your fiduciary responsibilities in ESG and build a framework. Meet your UNPRI commitments.
Companies – be aware of influences on your company that could affect your returns and manage them head on. Anticipate what your investors might be concerned about and report accordingly.
Learn about responsible investment and the difference compared to ethical investment.