Generally speaking, Environmental Social and Governance, or ESG for short, is used to describe a group of characteristics that can have a material impact on the long-term success of a company and, potentially, its long-term investment returns. Some examples of “environmental” criteria include factors such as energy consumption and greenhouse gas emissions. Examples of “social” criteria include supply-chain risk management, corporate citizenship, gender and racial diversity, and labor relations. Lastly, examples of “governance” factors include independent board leadership and CEO compensation. Investment managers that use an ESG approach consider these criteria and factors as part of their research and investment process.
Does ESG Work?
Using ESG factors in the investment process is still a relatively new phenomenon. However ,hard evidence as to whether ESG factors can make a positive impact on investments is emerging. Many studies overwhelmingly support the theory that integrating responsible investing practices into an investment decision-making process can have a positive impact on performance. Research suggests that companies with higher ESG ratings tend to outperform their peers and are much more resilient to market downturns.
Commonfund’s Perspective on ESG
We believe that ESG should be one of the many factors weighed when it comes to making investment decisions. Understanding that ESG factors may have a material impact on performance, we analyze these factors as part of our fundamental investment analysis process.
By becoming a signatory to the Principles for Responsible Investment (PRI), Commonfund joined a professional network of more than 1,200 global investors and asset managers who work to put the six principles into practice. These six principles are:
- Incorporate ESG issues into investment analysis and decision-making processes.
- Be active owners and incorporate ESG issues into ownership policies and practices.
- Seek appropriate disclosure on ESG issues by the entities in which we invest.
- Promote acceptance and implementation of the Principles within the investment industry.
- Work together to enhance our effectiveness in implementing the Principles.
- Report on our activities and progress towards implementing the Principles.
The six principles were devised by the investment community to reflect the view that ESG factors can affect the performance of investment portfolios and, subsequently, must be given appropriate consideration by investors. The principles provide investors with a flexible framework so that they can incorporate ESG factors into their decision-making and ownership practices.
How to Implement ESG?
There are two things institutions should consider when thinking about adding ESG into their investment portfolio. First, define what ESG means to your organization. Figuring this out may help you to determine which specific ESG criteria matter the most to your institution. Second, decide if your institution wants to go beyond ESG to a more targeted approach such as impact investing. Fundamentally, investors must decide if certain environmental, social, or governance issues are important enough to their stakeholders and beneficiaries to incorporate into the portfolio and the mission of the institution..