Once used in just a small corner of the investment world, the practice of integrating Environmental, Social and Governance (ESG) factors into investment decision-making has enjoyed massive growth over the last 30 years. For Harbour Investment Partners, ESG represents a lens through which to view and assess potential investments.
“ESG integration is focused on evaluating ESG factors through a financial lens; to determine which ESG factors represent real financial risks or opportunities for us and to make sure they’re appropriately considered as part of our investment decision making,” said Iain Russell Director of Harbour Investment.
ESG Integration falls under the larger umbrella of Responsible Investing (RI) but is distinct from Socially Responsible Investing (SRI), an approach which typically screens out certain sectors to allow investors to align their investments with their values. It is also different from Impact Investing which focuses on companies whose products or services are helping to solve some of the world’s environmental or social problems.
“Integrating ESG into your investment process is really just part of good investment. It’s making sure that you’re considering not only the core financial metrics that you always considered to determine a company’s outlook, but also making sure you are considering broader ESG factors which might not appear in the financial statements but might have a significant impact on the company’s value,” said Russell.
In the three decades since the first socially responsible investment index launched in 1990, global ESG assets have grown to US$35 trillion, according to Bloomberg, and are on track to exceed US$50 trillion by 2025.
For many, the environmental aspect of ESG is the one they may think of first, as ESG has become closely associated with green investing issues such as climate change and reducing plastic waste. These are important criteria to be sure, but the ESG umbrella is broader than just those two issues. The environmental aspect of ESG considers the effect of a company’s operations on the environment. This includes carbon emissions, but also how well the company manages risks of events such as oil spills or other disasters, and broader operational concerns such as water usage, waste management and the potential for other environmental issues in the company’s supply chain.
Looking at the other aspects of ESG, social factors generally encompass the company’s approach to its own workforce, as well as the effect a company has on the people and the communities where it operates. This includes the company’s approach to diversity, equity and inclusion, workplace health and safety and respect for workers’ rights, as well as product safety issues.
The governance aspect of ESG is critical for every company, as it covers a company’s internal functioning, including issues such as board quality, executive compensation, business ethics and board oversight of strategy.
