ESG Investing  

Why are ESG frameworks important?

This article is part of
Guide to ESG and regulation

“We recently published some customer and adviser research on ESG and found that only 10 per cent of advisers believe that the rise in client demand for responsible investment is short-lived.”

The increased focus on the ‘S’ and ‘G’ has also been driven by the pandemic, a racial reckoning in the wake of George Floyd’s murder, the ‘great resignation’ and rapidly increasing inequality. 

While addressing climate risks should and will undoubtedly remain a significant concern for investors, these recent events have underscored the urgency of addressing social and governance concerns and the ways in which they are interrelated with environmental ones. 

Lebec cites examples, such as climate change-induced events disproportionately affecting impoverished communities and exacerbating existing educational, gender and health inequalities. 

And as ESG is linked to higher return on investment and reduction in risk, all three components create equal value, which investors must not ignore. 

Claude Brown, partner at Reed Smith, says: "The ‘S’ and ‘G’ are gaining greater attention, but progress and momentum is behind the ‘E’. Additionally, the ‘S’ is fraught with political implications and shareholder challenges."

Fully embracing and measuring the 'S' and 'G' is expected to hold companies more accountable for diversity – from entry level, to the C-suite, to the board – and foster pay equity – including executive pay – improve employee wellbeing and improve overall social impact. 

Lebec adds: “The reality is that equity and inclusion policies have trickle-down effects, which are all very much a part of ESG. 

“That’s why it’s imperative we improve the disclosure and analysis of social impact data to understand the impact companies have on communities and how they treat their employees at headquarters and across their supply chains. 

“If corporations are not given clear guidelines and requirements on reporting social data, they will lose incentive to do it.”

Nigel Green, chief executive and founder of deVere Group, says: “To ensure that the huge inflows of private money are put to work in the correct way, it’s imperative that global regulators work together on an international framework of standards.

“A global regulatory framework for ESG investing would provide greater protections for those investors who are looking for profits with purpose, which will proactively help protect people and the planet for the long term.”