Responsible investing is widely understood as the incorporation of environmental, social, and governance (ESG) factors into the decision-making process. This is increasingly becoming a factor that entrepreneurs need to take into account to attract outside funding.
Environmental factors concern a company’s impact on the environment. Businesses potentially pose a threat to numerous sustainability issues, such as the creation of pollution in air and water supplies, the release of emissions from transport and fossil fuels, as well as other factors such as waste management or animal welfare.
Social factors refer to the way a company treats people, concerning matters such as the gender pay-gap, working conditions and health and safety. Finally, governance is focused on just that. The way companies are governed, including political donations, bribery and corruption, as well as transparency of information.
Investment is changing
Today, ESG accounts for a quarter of all investment funds globally. Over the 12 months in the leadup to January 2020, ESG funds took in $70 billion in assets, while more traditional funds experienced nearly $200 billion in outflow. This shows there is a real appetite for companies that practice sustainability, are governed responsibly and at the very least have a net neutral effect on their communities.
The tide may have already turned on traditional funds, and many successful investors recognise this. In a survey commission by Transmission Private, it was found that three quarters of the UK public would think more positively of a well-known billionaire if it was reported that they had chosen to avoid investing in controversial industries e.g. weapons, gambling, fossil fuels and tobacco. They noted that while wealthy people have purposely avoided these types of companies for a considerable amount of time, they have failed to communicate this publicly.
Even banks recognise this shift. Earlier this month BNP Paribas and ABN Amro both announced that they would be pulling back on financing the global market in raw materials, such as crude oil, after a series of scandals. This could mark a death knell for commodities trading globally.
In the past, it might have been that ESG funds were lower on returns than traditional ones, but this no longer the case. In the first four months of 2020 the S&P 500 ESG index, which tracks large companies in the U.S. that are highly rated for ESG, outperformed the regular S&P 500 index by 0.6%. Granted, this may be a side-effect of the coronavirus pandemic, but it could be a sign of things to come.
What it means for your company
Simply being aware of this change is the first step. While it is true that entrepreneurs have a moral obligation to consider the impact that their companies have on the world, what will really make them adhere to ESG criteria is their bottom line.
If you want to attract outside funding to your company, it’s worth noting that ESG has increasing financial relevance for businesses. Companies who incorporate ESG factors into their overall strategy find themselves with benefits such as increased consumer trust and shareholder value.
For the public and the investment community to see your company as ESG compliant, there are a number of steps you must take. First of all, it has to come from the top down. Open up a dialogue about ESG within the management team and develop a strategy to ensure compliance. Focus on the areas that you want to improve and build out from there.
Determine what your KPIs are to measure and evaluate ESG performance with the aim to improve over the short, medium and long term. If your team is pulling together to improve in the aspects you identify as the most important, then there is no doubt that investors will take notice.
However, if you really want to be known as a company that has fully incorporated ESG into its strategy, you need to communicate what you do. Release regular reports on your improvements and talk to the press about your strategy, as this is an excellent marketing tool. Just as it can improve the reputation of investors, the same is true for businesses.
The social impact of a company is more important than ever. If you as an entrepreneur want to maintain a positive reputation and attract outside investment, then it should be at the forefront of your agenda. The good news is that, especially if you are a growing business, it isn’t too late to incorporate ESG into your strategy.