Investor trends in environmental, social and governance impacts

The last few years has seen an accelerating trend to recognise the value of human capital; the workers in companies. The impetus for this trend has started to spread from the boardroom into investor relations.

Nicole Hawkes FRSA explores the impact of changing investor attitudes to environmental, social and governance factors when choosing where to put their cash. 

Impact investing has grown significantly in popularity as the demographic that invests, or indeed influences those that invest, shifts. And as environmental, social and governance (ESG) data becomes more widely available, investors have the appropriate metrics to base decisions on. 

With the rise of commission free investing apps such as Robinhood and Revolut, the stock market is increasingly accessible to retail investors and is no longer confined to the stuffy boardrooms of corporate investors. We are seeing the Venn diagram of human capital and investors starting to overlap and that can only mean what is important to the workers has to be taken into account when defining new standards for the workplace.

ESG standards in the workplace

Companies are recognising the need to adapt to the changing needs of their workforce. Increasingly, workers want an environment that supports a strong social conscience, promotes less waste and operates around a low-carbon footprint and where effective governance ensures these aspirations are achieved. 

There has been a rise in the number of organisations promoting social ‘goodness’; for example, Fintech For Good whose purpose is to promote ESG values in the fintech community through coordinating socially responsible finance initiatives. These kinds of approaches are becoming mainstream in the start-up scene. 

Encouragingly, such endeavours are not just confined to start-ups as incumbents are also getting in on the act. You would be hard pressed to find a FTSE100 company without a strong corporate responsibility mission statement. The range of initiatives is impressive, from CBRE partnering with an innovative start-up CupClub, where cups are rented rather than used once or recycled, to heavy investment into renewable energy from the unlikeliest of sources. Shell has aspirations to cut all of its net carbon emissions by 2050; for an oil giant to win hearts and minds will be no mean feat. 

There are both push and pull factors leading companies in this direction. They are both being pulled this way by their customers, employees and management, while – a newer and rising trend – also being pushed by investors. 

ESG growth and complacency

Perhaps counterintuitively, investing in good causes through their strong ESG credentials is often complemented by higher returns. A major study into this effect last year by Morningstar reported that almost 60% of the 745 Europe-based sustainable funds outperformed their non-sustainable peers over all timescales considered, by up to 1.83%. It also found that sustainable funds tend to outlive their non-sustainable counterparts. 

This is both startling and reassuring, and challenges the perceived inverse relationship between economic returns and protecting the environment and workers, showing there is a feedback mechanism at work. The environmental damage associated with poorly ranked ‘E’ companies is avoided, whole benefitting investors directly. 

Investors still need to be picky to meet their personal goals however. Analysis by Stratiphy shows there is often a poor correlation between companies’ environmental, social and governance scores. Analysis of the 345 biggest UK companies shows the strongest correlation between social and governance scores but far less between environment scores and these things. The breakdown of these scores for individual companies is therefore important and taking an overall view of any one company is too simplistic.

Trouble Brewing

Although the future looks bright for ESG, we must not be complacent. The last few years has seen a rise in nationalism and a prevalence of the view that climate change is not a serious threat. The previous US administration almost got away with approving an oil pipeline across Alaska, they decriminalised aspects of trophy hunting in Africa, and in Brazil there is considerable pressure to boost the economy by allowing increased deforestation of the Amazon. The world is nowhere near solving the climate and biodiversity emergency at hand.

There are also worrying developments from within the business community. The widespread adoption of Bitcoin, even by companies that purport to be environmental or conscientious champions, is one such trend. For example Tesla recently bought $1.6bn of Bitcoin and is often touted as an environmental champion. Yet Bitcoin is highly energy intensive and unnecessarily so. The process of mining Bitcoins was designed to become exponentially harder for computers to do as time goes on, and so vast computing resources are devoted to the task. At the same time, the blockchain ledger than underlies all cryptocurrencies requires significant commuting power to store and verify all transactions. 

The University of Cambridge University has developed the Cambridge Bitcoin Electricity Consumption Index (CBECI) that tracks and measures the electricity consumption of the Bitcoin ecosystem in real time. While assumptions need to be made in the model, the effect is clear, Bitcoin is likely consuming some 130Twh of power annually, and the trend is only going upwards. To put it in perspective, that is about three times the annual power consumption of Luxembourg, or over half a percent of the total global electricity consumption. For the world to take the ‘E’ metric seriously, this issue will need to be addressed.  

There is also the social impact of Bitcoin to take into consideration, since it is often used by criminals to hide their illicit proceeds. While this problem is understood by governments and regulators, we are yet to see what kind of measures will be implemented to stem this damaging effect. Where companies participate in Bitcoin transactions, it would be helpful to reflect these considerations in their ‘S’ scores to allow investors to scrutinize a commitment to social justice.

It is important to hold companies to account for the decisions that they make and to ensure any damage caused by their business operations is at least offset by other activities. Furthermore, it will not be sufficient for ESG policies to tick slowly upwards. We need to see an exponential increase in speed of implementation if these measures are to become the mainstream. 

Demand for people data 

In the past year we have seen increased expectations from investors to improve the working conditions for support workers. A good example of this has been calls for more transparency from Amazon to ensure its delivery teams were being kept safe and had enough PPE at the start of the pandemic. Demand for disclosure of data relating to employee management and protection has risen across all industries, to gauge corporate preparedness. Working conditions in developing countries, where sweatshops remain common, is also an important place to direct our attention. This focus is both important and expected to grow. 

Just Capital’s study of 890 publicly traded US companies reported that those with more transparent disclosure on practices and policies within their workforces were seeing a 1.2% to 3% higher return on equity. Considering how valuable human capital is, this is the time to push the topic further on investors’ agenda. 

The future is in our hands

It is liberating to see investors and employees now pulling in the same direction, and that harmonic interaction can have a profound effect on the way we work and live. It can lead to happier, healthier workers with a better work-life balance. 

The challenge is no longer convincing financiers of the importance of ESG, or of espousing the benefits of a healthier, more engaged workforce to employers. The challenge is to ensure the benefits of this revolution are spread evenly and fairly across all regions, all sectors, all job types, all skill levels, and all minorities. It is also important to sustain this change for the long run and ensure it is not just a passing fad. The potential benefits that ESG data can bring the world are enormous; it is up to us to make the best use of it.

Nikki Hawkes is a sustainability focused Fin-Tech enthusiast and co-founder at Stratipy.io, which helps retail investors create their own trading strategies and invest more sustainably.