The value of global assets applying environmental, social and governance (ESG) data to drive investment decisions is well north of $30-trillion. A large part of what is driving this is demographic changes and social attitudinal shifts. The generation Y & Z marketplace is demanding that firms take a more ethical approach to how they source raw materials and their stances on social issues.

There has been a tendency to lump ESG, socially responsible investing (SRI) and impact investing in one basket. The integration of ESG factors is used to enhance traditional financial analysis by identifying potential risks and opportunities beyond technical valuations. The main objective of ESG valuation remains financial performance. SRI goes one step further than ESG by actively eliminating or selecting investments according to specific ethical guidelines. For impact investing, positive outcomes are of the utmost importance, meaning the investments need to have a positive impact in some way.

SRI developed as a niche pursuit in the 1960s and 1970s. Many point to the apartheid period as a tipping point when investors began divesting from companies that did business here. In the 1990s, as major brands in the footwear and apparel sectors struggled with the “sweatshop” moniker, a whole industry developed around helping firms manage supply chains and wider ethical issues.

SA is considered an ESG trailblazer. The JSE introduced its Socially Responsible Index as far back as 2004. The Code for Responsible Investing in SA was set up in 2011, and the King IV Code on corporate governance followed a few years later.

As technology increasingly takes low-skilled jobs, highlighting that a firm actually employs lots of people and supports their families and communities will become more important

The Covid-19 pandemic is likely to further tilt ESG and SRI investment trends towards the “S” part (social) with more focus on people — after all, the pandemic has been a “people-centred” crisis. It has exposed health systems and access to them. Firms that offer health care may want to shout about that. Social protection similarly. In the pandemic, many fell through the cracks with no hope of a social safety net. That will become a bigger thing.

As technology increasingly takes low-skilled jobs, highlighting that a firm actually employs lots of people and supports their families and communities will become more important. Covid-19 will also probably push firms further towards diversity and inclusion. The onset of the pandemic coincided with a significant rise in racism as well as xenophobia and coincided with the Black Lives Matter movement.

There may also be a bigger focus in the coming few years on contradictory corporate behaviours. SRI generally uses exclusionary screens, or filters, that investors can use to exclude certain companies and industries that do not meet their value criteria. Many SRI investors screen out tobacco, alcohol and weapons stocks — fuel companies too. ESG investors actively opt in to companies due to the impressive ESG attributes they have demonstrated.

There is much greyness in all of this. A defence company that specialises in missile production and scores high on environmental sustainability, employee treatment, corporate governance and diversity may merit inclusion in an ESG fund. Social media platforms may be included in an ESG portfolio, yet, given recent experience of providing a platform for racism and extremism, it is hard to understand how they could pass a governance screen. Yet they do.

Many firms, mostly the big multinationals, are increasingly expressing their ESG footprint in terms of the UN’s 17 sustainable development goals (SDGs). Research shows that companies mostly focus on a small number of SDGs that are most relevant to their business operations, or on those goals to which they already make substantial contributions. This leaves them open to being called out if they are claiming to make progress on soft SDGs (jobs) while making a negative effect on harder ones (climate action). 

Legislative initiatives across ESG variables are increasing, particularly regarding the “S” component. Many countries have now introduced legislation requiring firms to report on their exposure to slavery and trafficking. There is an increased effort to include “health & safety” as one of the International Labour Organisation’s core international labour standards (alongside child labour, forced or bonded labour, discrimination and freedom of association). Expect more of this.

Smaller firms do not seem to be in the ESG and SDG game all that much as they are mostly not listed companies. Yet legislation and initiatives by larger firms will increasingly require their engagement. Small firms should be more proactive in promoting their ESG credentials. They employ most people in SA and often do great things in their communities. They can also be smart by integrating leaner, more environmentally friendly business practices that can be good for the bottom line. There is opportunity here.

During a visit to the National Aeronautics and Space Administration in 1962, US president JF Kennedy met a janitor and asked him what he did at Nasa. He replied that he was helping put people on the moon. When asked what they are doing in terms of their ESG footprint, with a little effort smaller firms can argue they are doing something similar.

• Rynhart is senior specialist in employers’ activities with the International Labour Organisation, based in SA. He is author of ‘Colouring the Future: Why the UN Plan to End Poverty and Wars is Working’.


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