Diversity and Inclusion in ESG Investing
We hear about ESG investing/ ESG funds a lot in the press these days. What is ESG investing and Why is this seeing so much growth?
ESG (Environmental, Social and Governance) investing refers to a form of investing that takes into consideration the impact from environmental, social, and governance concerns and material risks associated with those areas. Many of these investment strategies seek long-term positive impacts on society along with positive investment returns. For example, an investor may look at the carbon emissions impact from factories that a company operates (Environmental), or they may focus on the board composition of a company to make sure a diversity of thought is implemented at the board level (Governance). A company’s treatment of employees within the workplace ma also be another factor that the investor assesses (Social).
The past few years has seen a huge acceleration in ESG investing due to a heightened interest from investors. According to Bloomberg1, ESG assets will hit $50Tr this year, and is set to reach $140Tr by 2025. It is the biggest growth area within asset management, and especially popular among millennials. In a report by KPMG2, millennials are twice as likely as older generations to want their pensions invested sustainably, and 49% of millennial millionaires make investments based on social factors.
Why has ESG investing become so popular? This is because investors, be it large financial institutions or individual investors, are increasingly focusing on how their investments have an impact from an ESG perspective. Many factors such as experiencing extreme weather conditions, media attention on ESG issues such as plastic bottles infiltrating our oceans, and most recently the impact of the pandemic on our lifestyles have all led to investors finding increased importance and relevance in incorporating ESG issues in their investment considerations.
How does diversity and inclusion play a role in ESG investing?
Diversity and Inclusion play a very prominent role within ESG investing, and not just because it is the politically correct thing to do. There have been many research papers published which evidence that companies that have a diverse board, or a diverse workforce tend to have better outcomes in terms of their bottom line, as well as enhancing shareholder value. There is a clear business case for incorporating D&I into the workforce as we live in a more complex world with many business factors and risks to think about – having a diverse workforce allows different perspectives and opinions to be taken into consideration, often times leading to better products and services for the consumer.
For example, we used to see (and still continue to see) companies that mostly dealt with products aimed at females with executive teams that were comprised 100% of men! It does call into question how they make key decisions for their consumer and whether that is valid or not. So, from an investor’s perspective, it makes a lot of sense to try to assess a company’s management quality from a D&I angle in order to see whether their products are in-line with consumer needs. It is another layer of information that we gather when we analyze a company.
In my own personal experience, working in an environment where there is a diversity of background and thought has been a key contributing factor to my performance. I work at an asset management firm where we are retained by our clients because of our investment decision-making skills. Having colleagues with different life experiences and hence different views has provided me with a great environment where I can rely on their inputs to make informed decisions. For example, I work with a pharmaceuticals analyst who previously worked in a lab developing drugs. And my autos analyst used to be an engineer at a car company. Having access to their real-life experiences gives me a better insight into the business challenges that the companies that I invest in have to deal with on a daily basis. On top of all this, it is simply fun to work with colleagues who come from various different backgrounds. I definitely obtain so much of my energy and motivation from this type of work environment.
Historically, D&I used to be a board composition issue rather than encompassing the entire workforce. Apart from the most progressive companies, many corporates placed a focus on getting their board diversity right, and it was skewed mainly towards gender. They were trying to tackle the Governance aspect of ESG. That is now evolving, in tune with society that has put in focus the mistreatment or lack of career acceleration of minorities. The conversation is shifting from simple topics such as “how many women should we have on our board?” to more complex matters, such as “we have x% minorities at the new graduate-level which goes down to one-tenth of that original number at the management level. How can we tackle that?” – it has shifted the focus to the Social side of ESG, which to me implies that the investors and companies are grasping and tackling the more nuanced but more fundamental aspects of D&I in the workplace. That gives me hope that these matters will accelerate progress.
In essence, incorporating qualitative factors such as D&I is an essential part of making good investment decisions. Not only is it the right thing to do, it is the sensible thing to do because companies that have good business practices in place have happier employees and better outcomes for all stakeholders.
Sources
2.https://assets.kpmg/content/dam/kpmg/ie/pdf/2019/10/ie-numbers-that-are-changing-the-world.pdf
