The acronym ‘ESG’ refers to a broad range of environmental, social and governance criteria which investors are increasingly using to analyse companies alongside traditional financial metrics. Purists may disagree, but ESG has generally come to be understood as a catch-all term for the broader theme of ethically and socially responsible investing. Typical issues that fall under the ESG umbrella include:
- Environmental – carbon emissions, water and waste pollution, resource efficiency.
- Social – workforce diversity, employee health and safety, community engagement.
- Governance – shareholder rights, corruption, reporting transparency.
Richard Mattison, chief executive of S&P’s Trucost, has observed that “the assessment of companies’ ESG profiles has gone from being a ‘nice to have’ to a driver of decision-making”. As public awareness of corporate behaviour rises and governments introduce more regulation, companies and investors are increasingly concluding that sustainable practices make for sustainable returns. This is reflected in the amount of capital being directed towards the space (see chart). Data from Morningstar indicates £4.5bn has been invested in ESG funds in the UK so far this year, with70 per cent of inflows directed towards active funds.