What does the word “responsible” mean to the average board director? For some it could mean prudent. Or diligent, perhaps.
For a growing band of investors, however, the word is taking on a very specific meaning.
On Wednesday October 8th, I was asked to be a panellist at the inaugural Responsible Asset Owners global symposium at Church House, in Westminster.
While there were a number of topics up for discussion, it was clear that for most of the attendees – a mixture of investors and corporate governance experts from across Europe – responsible investing is synonymous with ESG investing. That’s to say that being responsible, as a board, is to take decisions that are infused with Environmental, Social and Governance (ESG) concerns. To think beyond the bottom line, in other words.
At Edelman, we produce an annual survey of 500 top fund managers globally. Last year’s survey showed that 85% of British investors believe that the long-term value in a business hinges on both financial performance, and adherence to ESG rules. The latest data will be published in the next few weeks, and we expect the figures to tell a similar story.
In an ever more divided society - where environmental concerns are such that schoolchildren are regularly skipping school to take to the streets in protest and where mainstream political parties are talking seriously about nationalising key industries - it is dangerous for business to be complacent.
Euan Stirling, head of ESG investment at Aberdeen Standard Investments, framed it well in a panel debate that I chaired earlier this year. ESG and profitability are about the same thing, he said, “they just operate on different timescales”.
“If you get environmental, social and governance factors wrong, they are financial, they do bite you,” he added.
At any point in history, the businesses that have survived have been those who keep their head up, scanning the horizon for issues, and remaining alert to change. We tend to think about this in the context of maintaining investment in R&D to avoid becoming a pedlar of obsolete technology. Or, at a more simple level, of maintaining a focus on driving new business rather than obsessing solely with servicing existing customers.
Yet the issues being flagged by ESG check sheets are germane to the very social contract that allows all businesses to operate. The basic tenets of free markets are now open to debate. Companies are increasingly expected to be paying heed to broader considerations than simply profit. It’s about survival.
There is real momentum behind the ESG movement. At Edelman, we work with more than 20 large asset management companies and they are all taking this seriously.
Those who mistake the ESG movement as a box-ticking exercise are being blinded by their own cynicism. Portfolio managers are under pressure from an increasing number of local authority pension funds, sovereign wealth funds and other big institutions to ensure that they invest in businesses that take such issues seriously. The threat of disinvestment is now real.
This may still be a small movement, but it has set out a clear direction of travel.
When contributing to the judging this year’s Non Executive Director Awards, I would hope to see some submissions where the nominee has driven the issue of ESG compliance at board level – that’s to say, of boardroom responsibility. It will be just one contributory factory. Yet any board that is not yet talking ESG issues seriously is simply storing up a problem for the future.
If you know a NED that is leading this crusade, they would be a worthy nominee: https://www.nedawards.co.uk/