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Time to Rethink the ‘S’ in ESG
COVID-19 prompts increased focus on a new ‘S’: The Stakeholder.
Almost two years ago, a teenage girl, Greta Thunberg, started her climate protest outside the Swedish parliament, spawning a movement that captured the world’s attention. Over the same period, what was less apparent was the shift in capital markets to place greater emphasis on Environmental, Social & Governance or ‘ESG’ issues at companies around the world. In 2019, an incremental US$70bn is estimated to have been invested in ESG funds while traditional equity funds suffered almost US$200bn of outflows.
What was once a marginal consideration for investors is now front and centre. Since Enron’s collapse in 2001, and subsequent failings that led to the financial crisis in 2008, governance has been high on the corporate agenda. Recently, as regulators, investors and activists have pressurised companies, environmental issues have also come to the fore. ESG factors are also increasingly relevant in the cost of debt– both S&P Global and Moody’s acquired ESG ratings agencies in the past year and are now including those ratings within their overall credit rating criteria.
Despite all this, as a measure, the ‘S’ in ESG – the ’Social’ – has been somewhat left behind and remains the hardest to define. ‘S’ factors impact businesses every day – customer or product quality issues, data security, industrial relations or supply-chain difficulties – often causing significant reputational damage. Think of the perceptions of how some retailers have treated workers; the damage to FMCG brands of links with child labour; and the loss of confidence in banks when IT systems fail and customer transactions can’t be honoured. These are all factors which fall within the ‘S’.