Why is ESG essential to humanity?
An introductory guide to Responsible Investment
by Kenneth von Rausch for RedPepper Mergers and GreenPepper Capital
ESG is the acronym for Environmental, Social, and (Corporate) Governance, the three broad categories of interest for what is termed “Responsible Investment (RI).” They are investors who consider it important to incorporate their values and concerns (such as social or environmental concerns) into their selection of investments instead of simply considering the potential profitability and / or risk presented by an investment opportunity.
Environmental factors relate to the company’s policies on, and interactions with, issues that affect the natural environment. This includes replacing polluting industry practices with recycling technologies, addressing climate change through decarbonisation, swapping conventional energy for renewable energy, changing out pesticides or genetically modified organisms (GMOs) with renewable agricultural practices, and better managing the extraction or use of raw materials in a plethora of ways.
Social factors broadly concern the corporation’s interactions with other societal interests. These issues typically include employee and labour relations, human and animal rights, certain forms of workplace diversity, and the procurement of the products or services that the company supplies.
Governance factors typically focus on the corporation’s structure and operation, and can include issues such as employee diversity, gender equality, gender variance acceptance, executive compensation, board member demographic diversity, political spending or lobbying, and management structure and policies.
We challenge you to think through these lists, relating them to your life and workplace and consider how much better your workplace would feel and perform (especially financially) if many of these points were equitably optimised.
Read more in our coming article about why ESG investing returns higher profits and de-risks business. Doesn’t that sound wonderfully logical?
Commercial Synopsis
Responsible investment unpacked
Responsible investment has many names. This happens because the overarching definition gets hijacked by entities seeking to promote a preferred sales proposition, in an attempt to be commercially competitive.
These alternatives include terms like “socially responsible investing”, “sustainable investing”, “impact investing”, and “mission-related investing” among many others.
At GreenPepperCapital, we use overarching terminology like “Responsible Investment (RI)” and “ESG investing”, since our early-stage investment focus means we touch all niche propositions agnostically. Simply put, we are no less well positioned than the next person, to compare the relative value of different attempts to “do good”?
Furthermore, varying ESG issues may or may not be relevant in an investee / portfolio consideration, depending on the specific area of ESG being targeted. While this omission, does not devalue one over the other, the systemic nature of problems / solutions does make it challenging to always “do no damage” even with the best intentions.
At GreenPepper Capital, as alumni of Harvard University and Cambridge University – Centre for Sustainable Leadership – we leverage world-leading best practice to design a change index which measures the nature and extent of the proposed positive impact of an investment. This allows us to compare the merits of two investments, which have different positive impacts but compete for limited investment capital, without ‘choosing sides’.
This makes GreenPepper Capital activist in our approach as investors and investment managers.
It also means we position early-stage business to be financially sustainable – empowering a brighter future.
ACADEMIC
All GreenPepper Capital articles are based on empirical evidence and factual sources. We welcome professional commentary.
- Morgan Stanley 2020, Sustainable Signals New Data from the Individual Investor, Morgan Stanley, viewed 10 Nov 2020, www.morganstanley.com/ideas/sustainable-socially-responsible-investing-millennials-drive-growth.
- Pitchbook 2020, Sustainable Investment Survey, Pitchbook, viewed 10 Oct 2021, www.pitchbook.com/news/reports/2020-sustainable-investment-survey.
- RIIA 2020a, RIIA, Melbourne, viewed on 2 December 2021, www.responsibleinvestment.org/.
- RIIA 2020b, Responsible Investment Benchmark Report 2020 Australia, RIIA, viewed on 27 Nov 2021, www.responsibleinvestment.org/resources/benchmark-report.
- SASB 2020, SASB Materiality Maps, SASB, SoPact, viewed 30 Oct 2021, www.materiality.sasb.org/.
- SoPact 2020, Impact Management Plan, viewed on 29 Sept 2021, www.help.sopact.com/knowledge/design-effective-due-diligence-process.