When you first think about environmental, social, and governance (ESG) investing, there’s a chance that environmental issues might be the first that come to mind.
This is entirely understandable, as carbon emissions, climate targets, and sustainability pledges have been dominating headlines for some time now. This might lead you to focus solely on them when you’re considering a company’s ethics.
However, the social and governance pillars are just as important. These affect how a company treats its employees, engages with customers, and makes decisions behind the scenes that influence its long-term performance.
Understanding these factors could give you a clearer picture of a business’s decision-making process and ethical standing, insights that could be relevant if you’re considering investing.
With that in mind, continue reading to discover how the social and governance pillars could influence the performance of a business, and what this means for you as an investor.
The ESG pillars allow you to identify how ethical a company really is
Simply put, the ESG pillars are a set of criteria to help you understand a company’s ethical operations.
They consider three separate criteria that determine a business’s impact on our society and the planet. They include:
- Environmental – This shows how a company’s operations affect the environment and the measures it takes to reduce its impact, such as managing carbon emissions.
- Social – This focuses on a company’s relationship with its employees and any measures it takes to improve working conditions and support the wider community.
- Governance – This refers to how ethically a company is run, such as its corporate structure or tax strategies.
If you’re concerned about global issues, such as climate change, you may decide to invest your wealth solely in companies that make efforts to reduce their carbon emissions.
So, the ESG pillars could let you know that companies are meeting specific environmental criteria, giving you the peace of mind that your wealth is actively improving the world around you.
The social and governance pillars are just as influential in a company’s operations
While the social and governance criteria are often overlooked, they still significantly affect how a business operates.
Understanding these pillars could help you identify companies that manage people and processes effectively, which, in turn, can boost performance. Here’s how.
1. Social
When a company focuses on social issues, it usually emphasises employee engagement.
This could lead to higher productivity, as staff feel valued and motivated to contribute to a company’s success. It may also reduce staff turnover, saving recruitment and training costs.
Moreover, if a business treats its employees poorly or negatively impacts the communities in which it operates, this could harm its reputation or disrupt operations.
Paying close attention to these social factors could limit these risks and preserve stability.
Customer relationships can also benefit from close adherence to social criteria. Indeed, businesses that demonstrate responsibility and fairness in their client relationships can strengthen loyalty and trust, further supporting consistent, long-term performance.
2. Governance
Governance can demonstrate how a company makes decisions, manages risk, and ensures accountability.
Ethical governance structures, such as independent boards and transparent reporting, could reduce any exposure to regulatory issues.
If you clearly understand a company’s approach to governance, you may gain valuable insight into how well any decisions are scrutinised, how risks are monitored, and whether management is held accountable for its decisions.
As an investor, governance factors can indicate that companies operate responsibly internally and remain vigilant about risks.
You may wish to review a company’s social and governance credentials before you invest
Aside from the potential financial benefits, social and governance factors could help you better understand how a company operates and approaches long-term planning.
Indeed, looking closely at these areas could give you insight into how it treats employees, interacts with customers, and handles challenges as they arise.
Companies that manage social and governance responsibilities efficiently might even be more resilient when such issues arise.
This could give you greater confidence that the business is focused on sustainable performance rather than short-term results.
It’s important to remember that ESG credentials aren’t always a guarantee of ethical behaviour or financial success.
For example, some companies have been known to “greenwash”. This is when they claim to be socially and environmentally conscious while engaging in practices that may not be ethical.
Still, reviewing ESG pillars could offer a perspective that typical indicators might miss, helping you to align your investments with your values should you choose to do so.
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We could help you explore how social and governance factors might align with your investment goals, risk tolerance, and time frame. Please contact us today, and we’ll set up a meeting.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.