ESG Risk and Asset Management | What You Need to Know
Published on by Robert Ramsay in Assurance, Consulting, Industries
In the first post of our Environmental, Social, Governance (ESG) series, we talked about what ESG is – Environmental, Social, and Governance issues, where and why they matter, and the potential impact private companies are starting to see as their public company customers ask for evidence of ESG measures.
In this post, we’ll talk more about risk and asset management, including what portfolio managers are looking for.
But first, a little background.
How did we get here?
There are activist organizations like Greenpeace and regulatory organizations – in the US, Occupational Safety and Health Administration (OSHA) and the Environmental Protection Agency (EPA). In the accounting world, initiatives like this are often started or led in Europe – triple bottom line reporting, where you’re measuring your people, your planet impact, and your profits, for example.
The term ESG
The term ESG was coined in 2005 (read more about that in the McKinsey report (referenced in the previous post), but in the last few years, Google searches on the term have skyrocketed while searches for corporate social responsibility have dropped off.
Things that used to be considered corporate social responsibility are now under the ESG umbrella – and instead of being simply about giving back to the community, it’s focused on measurable elements that matter to investors – and to the stock price.
ESG and risk-based investing
ESG is reportedly the fastest-growing segment in the asset management industry, with $41 trillion in ESG-linked investments. And analysts are asking more ESG questions in corporate earnings calls, too, which means CFOs are having to answer on ESG matters. In May 2018, ESG came up on about 1% of these calls. In 2021, it was 19%.
Future leaders are being trained on ESG as well – major universities, including Wharton, Yale, and Stanford are offering undergraduate courses that include social impact content, and Stanford’s Impact Investing Club is rapidly gaining momentum.
I recently listened to an investment portfolio manager explain how he’s using ESG to evaluate potential investments, and he said “There are a lot of sectors that are going to be around in 20 years, but not every company is going to make it. I want to bet on the winners, and I think the ESG component is a risk factor, so I want to lean into companies with higher-than-average scores. Within each sector, I’m going to cut the bottom 50% of scores, and only consider the top 50% for potential investment.”
Choosing what ESG elements to measure
There are a vast number of ESG elements – how do you decide what to track? Instead of focusing on statutory and minimum requirements, start with your strategy: as an enterprise, what’s important to you? What helps you win? What aligns with your business objectives?
Like in finance, there’s a lot of financial data that’s not audited by your assurance firm or included on your tax return that you use to run your system or run your business. There are a lot of these ESG measures that maybe won’t become part of Sustainability Accounting Standards Board (SASB) requirements, but that are important to your business.
Looking ahead
In part 3 of our ESG series, we’ll take a closer look at each of the three ESG categories and what they really mean: environmental, social, and governance. And if you’d like to talk about ESG or have a question, contact us. We’re here to help, as always.
