ESG investing which is also known as impact investing may seem like the remedy to the fouls of capitalism, however, if it is not focused on the right issues it will contribute to the failure of the globalised economy. Investors are increasingly prioritising Environmental, Social and [Corporate] Governance (ESG) issues when looking for companies to plough money into, in expectation of more than just financial return.
Recently, we have seen a rise in companies committing to ‘go green’ by means of divesting in fossil fuels and investing in renewables to mitigate climate change in response to pressure from their investors. Additionally, some corporations have taken on initiatives to deal with social and governance issues, as investors are concerned about human rights and demand accountable corporate governance. Consequently, other than being environmentally friendly, the social aspect of ESG has the potential of reforming the bad reputation that corporations have gained through their inconsiderate treatment of their workers and communities in which they carry out operations.
Being socially responsible includes the review of diversity, human rights, labour standards, data protection and consumer protection; among many other factors that affect a corporation’s staff, supply chains and communities. Thus, socially responsibility should be a priority for corporations in addition to advancing climate change action. This would ensure the protection of the most important stakeholders of the economy: the people. There are examples of how socially responsible investing has influenced companies over the last few months such as Kirin’s withdrawal from Myanmar, BlackRock’s cultural reset, and scrutiny into Deliveroo’s rider earnings model.
The case of Kirin has been its re-evaluation of a joint venture in a Myanmar military-backed company, in response to the junta’s disregard for human rights. The ties that Kirin held with Myanmar Economic Holdings (MEHL) proved problematic as one of its largest shareholders, Norges Bank, considered excluding it from its portfolio. This proves that the impact investing approach taken by Norges Bank has been effective in advocating for human rights by threatening divestment of a company that is connected to the junta; similar to economic sanctions issued by sovereign states or international organisations.
Moving on to BlackRock’s cultural reset which follows damaging allegations of discrimination and sexual harassment within the firm, which prides itself of being on the forefront of ESG investing to fight climate change. The financial institution’s chief executive, Larry Fink, assured their shareholders that the firm is committed to a culture of diversity and inclusion as it is essential for the enhanced performance within the firm. This shows that ESG is not only about the investment decisions that financial institutions make but also its internal human resources decisions, that matters to its investors.
Lastly, the scrutiny of Deliveroo’s rider earnings model which has in part contributed to its underwhelming London initial public offering (IPO). Deliveroo maintains that its riders are independent contractors, so they do not have to be paid a minimum wage or have guaranteed hours. This led to reluctance among institutional investors from buying shares during its IPO, due to scepticism of the food delivery company’s ability to resist future regulations or social issues which may arise. This signals to other companies in the gig economy that investors are critical of labour management, which means that investors are considering ethics and sustainable practices rather than immediate financial gains.
Therefore, although climate change is a critical issue, social responsibility should be prioritised in corporate agendas. The examples above have illustrated the importance of the social aspect of ESG investing, as investors are looking past short-term financial rewards for moral and sustainable business practices impacting people. However, developing a metric for measuring diversity, human rights and labour standards can be tricky, if not, impossible. Hence, investors should seek to engage with companies to make changes instead of divesting themselves based on their moral compass. This would ensure that shareholders and corporate boards have a symbiotic relationship when it comes to making decisions that affects the lives of people.