The ABCs of ESG

Recently Oyster has been covering ESG topics that have been front and center in both the headlines and with regulators. Today, we are taking a step back to address the basics of what ESG is, how it evolved, and why it is such a cornerstone subject for some investors and businesses.

What is ESG?

You can define ESG categories this way:

• The “E” covers topics relating to the Environment such as deforestation, waste management, clean water, energy efficiency, greenhouse gases and carbon footprints, to name a few.
• The “S” covers topics relating to Social Issues such as workplace issues, labor standards, wages, benefits, privacy, human rights, human capital, social justice, community-based services, diversity and racial injustice.
• The “G” covers topics relating to Governance such as a firm’s corporate board structure and composition, it’s decisions for a sustainable future and compliance with the UN’s Sustainable Development Goals, lobbying efforts and political contributions in favor of positive societal forces, outright visible stances against corruption, self-dealing and actions that would harm the efforts covered under the two categories above.

Why is ESG so popular?

Environmental, Social, and Governance (ESG) topics have always been of critical importance to those focused on it. Rapid changes in technology, immediate access to information, and crises in public health, social justice and climate issues, are making the economic impacts within ESG not only being felt worldwide but are also being recorded and reported on daily. As a result, the global population can now see how the direct actions or inaction of businesses can have an impact on key issues for humanity.

Through finely tuned metrics, businesses today can now be measured against many ESG attributes, including how they are working in support of the UN’s 17 Sustainable Development Goals, adopted by 193 Governments worldwide in 2015 to “protect the planet and ensure dignity and prosperity for all by 2030.” These non-financial corporate measures can be used to drive a company’s actions and thus directly impact the flow of investments to them.

What has changed?

What is now a finely tuned mechanism and investment approach started as nothing more than a filtering process known as Socially Responsible Investing (SRI). Using this process, firms would be eliminated from investment portfolios because of their focus on issues viewed by some as detrimental to society. Tobacco, firearms, and alcohol were the prime examples. Today, with the vast amounts of big data available combined with the ability to digest and report on it, ESG takes on a more dynamic approach that looks to reward companies making a positive difference across environmental, social and governance categories. Some investors use the term “Impact Investing” to describe how they can put their dollars to use to, in the words of Ben Franklin, “do well while doing good.”

Now and Future Implications

Firms operating in this space either through stated ESG investment offerings or by having their own ESG goals need to understand the risks from a regulatory and reputational perspective. While there are limited rules or regulations specific to ESG at this time, there are many that apply from a basic investment, fiduciary, disclosure or corporate governance perspective that must currently be adhered to. The regulators also continue moving swiftly to define even more specific rules.

Oyster Consulting’s team of experts can help you formulate your ESG investment strategy and review your current disclosures so you can capture your share of this market and ensure you are meeting today’s regulatory standards. For more information how Oyster can help, click here and one of our Relationship Managers will be happy to assist you.