ESG is not corporate social responsibility (CSR), whereby company profits are disbursed for social change. Instead, ESG is ingrained in the very ethos of the company, and it protects the organisation from potential environmental and social pressures.

As an investor, you essentially vote with your wallet – if you decide to base your portfolio on ESG-compliant companies, you are ultimately rewarding good behaviour, and setting in motion a cycle of positive social change.

While there is much hype surrounding the environment factor of ESG, in the first of our two-part series, we’re diving into social and governance, and unpacking what they both entail.

How does ESG investing work?

This means only investing in companies that are driving a positive change, whether they’re taking significant steps to reduce their carbon footprint or building a diverse and equitable eco-system via their hiring policies. You can find ESG-linked products within mutual funds, equities and bonds.

What do social and governance factors mean in the ESG context?

A social-focused company is one that puts its stakeholders at the heart of its policies. Some examples include:

■ Hiring a diversity, equity and inclusion (DEI) team
■ Ensuring that all employees are given equal opportunities and treated fairly
■ Operating ethical supply chains
■ Making sure that labour laws are enforced throughout the entire value chain (including no child labour)
■ Paying fair living wages

The Fortune 500, US-based ManpowerGroup Global, for instance, has promised to up its anti-racism stance, offer more opportunities for women in leadership positions, and continuously upskill and reskill employees.

Governance, on the other hand, ensures that the people making the big decisions – the C suite and the board of directors – are adequately audited, and uphold the values of accountability and transparency. This could include:

■ Hiring a diverse board where all genders and races are adequately represented
■ Ensuring that the chairman of the board and CEO of the company are not the same person
■ Conducting fair and regular board elections

Who decides if a company or product is ESG-compliant?

Therein lies the rub – there is no standardised nor globalised framework for ESG criteria. ESG ratings are calculated by independent regulators.

Says Endowus’ Min: “The industry has long been described as having an ‘alphabet soup’ of standard-setters, which has perhaps created unintended confusion in the marketplace.

“But regulators around the world are working to address the lack of clear definitions and standardised data, and there has been some progress made… though it will take time for countries and regions to adopt any unified framework.”

It is an area that local authorities are trying to regulate. In July 2022, the Monetary Authority of Singapore (MAS) reported that it is currently drawing up a set of disclosure and reporting guidelines for ESG funds.

While the full set will only be announced next year, some preliminary measures include that companies will have to disclose the progress of their ESG goals annually. Funds must also “allocate at least two-thirds of net assets for sustainability investments as per their stated strategies”.

Earlier this year, MAS, together with the Singapore FinTech Association and fintech company STACS, launched the blockchain-based registry ESGpedia, which aggregates, records, and maintains ESG certifications and data of companies across various sectors and global verified sources.

This mitigates the risk of greenwashing. A 2019 study by 2 Degrees Investing Initiative found that 85 per cent of environmentally linked funds had been accused of misleading investors.

Aren’t these measures more environmentally aligned than S and G?

When the term ESG was coined in 2004 by the United Nations Environment Programme, the former head of the programme and sustainability expert Paul Clements-Hunt called it GES, alluding to the fact that governance should be the most important area of focus.

The acronym, he was told, was “not so sexy”, and instead, the E was placed up front, foretelling the growing importance of climate change. Carbon emissions is certainly a trendier topic today, and most regulators are focused on building metrics to measure companies’ carbon emissions.

HSBC Asset Management’s CEO and Head of Southeast Asia Patrice Conxicoeur agrees, and cites its recent 2021 Sustainable Investment survey.

“The top three ESG issues for investors are sustainability, environmental impact and climate change. However, we believe that the social and governance factors are slowly gaining ground as investors want to invest in companies, including fund managers, that are aligned to their ESG approach.”

But it’s an uphill battle. In a World Economic Forum report in 2022, Michael Froman, Mastercard’s vice-chairman and president of strategic growth said: “While there has been much discussion about the role of the corporation in society, the standards for measuring a company’s [social] impact on society lag behind other metrics.

“If we want to incentivise corporations to include the goal of progressing positive social impact in their business strategy, we need to develop metrics that reflect that… It’s difficult to compare what one company does to broaden financial inclusion to what another might do to further education.”

How can we set metrics in place to evaluate good social and governance practices?

There is no one-size-fits-all solution, which is why setting frameworks is a challenge. For instance, the DEI requirements for a company operating a small-to-medium service-led business in Singapore would be very different from an MNC with operations in the remotest countries of the world, where they must also consider their entire supply chain.

Fund managers have their own set of criteria when it comes to measuring ESG impact. For example, when it comes to social factors, Endowus reviews the reported metrics and scores of a fund to ensure that issues like human rights are being scrutinised by the fund manager.

“As for governance, the focus is more on bribery and corruption, board diversity and structure, among many others,” adds Min.

Doesn’t it all sound rather complicated?

It is, but it’s not a reason to give up. Says Min: “As investors, we shouldn’t avoid ESG conversations just because they are unwieldy. By the same token, we shouldn’t shy away from ESG investing even if the ecosystem appears imperfect.”

It is true that ESG investing has gotten a lot of flak in recent years, for reasons such as a lack of governance and greenwashing claims.

Moreover, given the fact that ESG encompasses three very broad and diverse themes, it also means that no single company can excel at everything. Take Tesla for instance: It is a torchbearer for sustainability, but has faced controversy over social and governance factors – in 2017 and 2018, The Guardian published numerous reports of lawsuits by Tesla workers alleging gender discrimination, sexual harassment, homophobia and racism at the company.

Do we need to give more “love” to companies that rank high in social and governance?

Social and governance factors are the backbone of a corporation – by making them a key priority for investors and stakeholders, they’re now being used as factors that could potentially have a real impact on the company’s balance sheet.

In terms of governance, better regulations are required to ensure that the C-suite makes decisions for the greater good, and that failure to do so should not simply amount to a slap on the wrist.

There needs to be greater ownership, and this only comes if the consequence of a negative action is dire enough to force change. As retail investors and employees, we finally have a say in how corporations conduct themselves, and have the power to hold them accountable.

“It’s important to care, because increased demand translates to increased pressure on companies to bring about quicker change. As a retail investor, you have a voice, and you can make sure that it’s heard not only by engaging with fund management companies and regulators, but also by investing and pushing companies to do and be better,” emphasises Endowus’ Min.

HSBC Asset Management’s Patrice adds: “In fact, the longer the investment horizon, the more ESG factors matter.”

Ok, so how do I start?

It really depends on what’s important to you; the starting point is to do your homework.

Min says: “Investors need to find out more about the costs involved in ESG investments. It is essential to take the time to read up on the company that you choose to invest in, and also find out their historical performance.

“Investors can identify sustainable and ESG-focused funds by checking for public disclosures, such as under the Sustainable Finance Disclosure Regulation, or the Fund Manager’s voluntary sustainability reporting. They should also keep a lookout for accreditations such as being part of the United Nations-supported Principles for Responsible Investment.”

And finally, it is important to assess your investment objectives. Patrice advises asking yourself the following questions: “What ESG criteria or investment themes are most important to me? And is my fund manager of choice transparent about their ESG practices and disclosures?

“A good way to start is to explore available ESG-themed fund solutions offered by reputable asset managers and financial institutions.”

This article was first published in Her World.

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