An Introduction to ESG

ESG. The omnipresent buzz word of 2020. But what does it actually mean? Environment, Social, Governance is the answer. On the face of it, ESG appears to be an amalgamation of everything we see Millennials debating on social media. Young people seem determined to make ESG a central part of society. In the recent 2019 UK election, 56% of people aged 18-24 and 54% of people aged 25-29 voted Labour: a political party whose manifesto revolved around heavily taxing large corporations and the rich, as well as looking after the environment. Being sustainable, reducing suffering and living in a fair society are all of major importance to the younger generation. But what exactly do these terms mean, and how are people hoping ESG will change society?

Almost everyone will have seen at least one episode of the great Sir David Attenborough’s programmes on TV about the beautiful world in which we live, and why it needs protecting. In this process of protection, it is very difficult to find a single entity to blame for the destruction of our planet. Everyone must take responsibility for it, for example: our consumption of fossil fuel pumps out CO2 at an alarming rate. The irony is that without this, how would Attenborough and his team have flown around the world to film his amazing programmes and bring attention to the problem?

Another example is farming animal and plant products (yes, plant products!). This, alone, has led to widespread deforestation of our Earth’s lungs. Our water systems and marine biology have been choked by pollution and microplastics. Waste products of the burgeoning fashion industry have been incredibly damaging too.

For humans to survive, we do need to extract elements from the environment. It is what and from where that we need to think about. This is the quintessential point of ESG. Whatever we do, we must do it sustainably.

Voting statistics for Millennials and Gen Z in the UK and in the USA suggest that support for parties with more socially aware policies is growing.

Policies that include promoting racial and gender diversity in the workplace, improving workers' rights, working conditions and pay now really matter to voters.

Recently, companies have been on the receiving end of fierce repercussions for not fulfilling these ideals, even though they are not yet law. Boohoo, the publicly listed fast fashion company has a market worth of around £4.5bn, trading around 330 pence per share at the time of writing. They reached the dizzy heights of 415p per share in June 2020, but lost almost one-third of their value after news emerged of their “modern day slavery” practices in Leicester’s factories.

Companies who look after their workers, with living wages, good working conditions, and maybe even some valued employee benefits will be well set up for the long term. Primarily because these firms will already be seen by the public as being socially responsible. This should ensure they will be able to use their ESG policies as a stable base that consumers embrace, leading to customer support and sustainable business growth.

Unfortunately for Boohoo, their Governance isn't much better than their business practices. In the summer of 2020, it was announced that they would be offering their bosses an incentive of £150m in bonuses if their stock market value rose by two-thirds in the next 3 years. Good for the tiny handful of owners, very bad indeed for the world.

Large dividend payouts to executives are not popular in the sphere of ESG. Neither is corporate bribery, corruption, tax fraud, and poor transparency.

Tech giants like Facebook, Google and Microsoft have long been targeted for their avoidance of tax through setting up headquarters in countries with low corporation tax and finding loopholes in government policies. Many countries and citizens are angry about the loss of tax earnings their countries could receive from these powerhouses: in 2018 Facebook earned £1.65bn of revenue, but paid just £28.5m in corporation tax. The BBC recently reported that Facebook, Google and Microsoft together are avoiding around £2.2bn worth of tax in poorer countries.

The charity, Action Aid, is demanding that multinational corporations pay a global tax rate. The world-wide benefit of this could be huge, illustrating the positive effect good governance can have. Getting ‘buy-in’ to the idea is what the Social side of ESG represents as there are huge social benefits of corporations paying full tax rates in many of the countries in which they operate. It should also be noted that the fact these organisations employ hundreds of thousands of people globally is a social benefit too.

Overall, ESG aims to encourage companies to be more responsible in two key business aspects: people and the environment. Good corporate governance comes down to those two main elements. Look after the environment. Look after your people. Good results for all involved follow, a win-win situation by any measure. Keep your eye out for the next article in the ESG mini-series: it will be explaining how ESG ratings are derived, and what you need to watch out for.

Written by Rory McMichael