Who could ever forget BP’s oil spill in the Gulf of Mexico, the governance scandals which saw the collapse of USA’s Enron and Australia’s HIH, and when Nike came under fire for abusive labour practices?
Not only did these incidents – and others like them – cause harm to many people, they affected investors with sudden, sharp financial losses.
If there’s a silver lining on these regrettable incidents, it’s the subsequent ratcheting up globally of boardrooms’ focus on better managing environmental, social and governance (ESG) risks, along with the pace that has gathered around the notion of “sustainable investing”.
Not to be confused with “ethical investing”, sustainable investing is a long-term investment approach that incorporates ESG factors into the investment process. (Ethical investing, on the other hand, is when investors choose not to invest in certain companies on ethical grounds – for example, taking a stance against tobacco.)
At its core, sustainable investing is an approach based on the principle that a company’s long term investment value is integrally linked to the way it manages ESG or sustainability risks. This might include how a company approaches employee relations, human rights, corporate governance, executive remuneration and climate change.
These types of risks are often difficult to measure in monetary terms and so have traditionally been overlooked in financial analysis. But, as evidenced by several high profile incidents, they have the potential to affect the risk and return of investments.
For that reason, more investors – both large and small – have started to care more about how companies’ make their money, not just how much money they make. In fact, recent research conducted by BT Financial Group showed more than 90 per cent of Australians believed sustainable investing is important.
While retail investors say they care about companies’ behaviour, they also say they don’t know how to measure it or where to access simple, easily digestible and transparent information.
In an industry first, BT has integrated sustainability scoring of more than 200 managed funds and listed companies into its wealth platform, BT Panorama.
This new option gives retail customers and financial advisers the ability to compare a company’s performance in relation to ESG factors. For each investment, they can access an overall sustainability score as well as individual scores for environment, social and governance factors, along with a “controversies” assessment ranking.
The scoring has been developed in partnership with research houses Morningstar and Sustainalytics.
By making ESG scoring easy to access, it is much simpler for retail customers and financial advisors to digest information that had previously been more challenging to find and understand, unless you’re a seasoned, professional governance advisor.
In this way, investors can feel more empowered to take into consideration the sustainable approach of companies when making decisions about their investments.
It’s important to point out that sustainability scores are not an evaluation of an investment’s financial performance, and do not provide an assessment of overall investment merit. Rather, they should be used in conjunction with other measures for a more complete approach to investment portfolio construction.
By Michael Bennet
Editor, Westpac Wire