ESG: Three letters that drive impact investing
Making investments to generate positive, measurable impact is the benchmark.
Businesses can get a bad reputation for any number of reasons, including (but not limited to) poor treatment of employees, unfair wages, negative environmental impact, tone deaf social media ads – the list goes on and on.
In the digital age, all of these grievances are amplified on a global stage. Social media gives individuals a platform to raise these issues and bring them to light. And if a company is on the market, any one of these factors can impact their ability to attract buyers or investors. How can you put a price on social outrage?
One silver lining to COVID is that it has put the spotlight firmly on ESG - environmental, social and governance factors. Inequality has been brought to the forefront alongside a growing global consciousness, making impact investing a key area to watch in 2021 and beyond.
More and more investors are deciding it’s not worth the risk to take on companies with poor ESG performance. In short, ESG can be a dealbreaker in more than one sense of the word. As impact investing grows in popularity, companies need to carefully look at the impact of their actions.
In a new report from Mergermarket and Baker Tilly, 65% of international dealmakers said ESG was a key consideration when making investment and M&A decisions, and 60% said they had walked away from a deal due to the target’s ESG issues.
Having a strong ESG track record can significantly increase a company’s chances of a strong sale and high valuation, as they have already overcome many of these hurdles around reputational risk (and potential legal repercussions).
E for EnvironmentalEnvironmental impact is at the forefront more than it’s ever been. Sustainability aspects are carefully considered during ESG due diligence – especially in environmentally sensitive industries, such as mining or manufacturing.
Maintaining compliance with all environmental regulations while delivering value is a careful balancing act, with some companies falling short in the former to prioritize the latter.
Even if a company has worked to meet all the relevant compliance requirements, it can still face challenges if its past performance record shows any negative environmental impact or has angered the community.
While divesting environmentally ‘risky’ assets like coal might seem like an easy win for companies making the shift toward cleaner energy solutions, it isn’t always that simple.
According to Mercer’s Chief Investment Officer Kylie Willment, if you have ownership of these types of assets, you at least have the ability to influence the decisions made. If they are sold to someone else, there’s no guarantee that these green concerns will be addressed; having a transition plan in place is ultimately what needs to occur to spur meaningful environmental change.
S for SocialThe social element in ESG has traditionally referred to how a business engages with its employees, contractors, and suppliers, but it has widened in recent years to encompass broader issues of discrimination, diversity, corruption and misconduct.
People are at the heart of every company, and if there is any sense of unfairness or injustice toward them – whether it relates to fair pay, pay inequality, working conditions, or improper treatment – it will come to light, often with serious consequences.
Evidence of this growing social consciousness includes ‘Weinstein Clauses’, a frequent addition to due diligence that requires a target company to disclose any allegations of sexual misconduct, particularly among senior executives.
G for GovernanceThe G in ESG is all-encompassing. If a company is failing in either the environmental or the social elements of ESG, a lack of proper governance can account for both.
Investors may be able to improve a target's poor ESG record, although companies can expect to pay for these issues in the form of a much lower valuation. But if a company’s corporate standing needs to be overhauled completely, they could be bidding farewell to their deal chances completely.
Ultimately, the key to eliminating ESG risk is governing your information to a degree that you are always placed to act quickly and respond to the changing market. Full visibility and accountability across all areas of business are paramount to both performance and compliance.
Maximizing your company governance is no different to preparing the company for a deal. If a business runs well, it’s sellable; if it’s sellable, it runs well.
“What is required for a deal is the same for executing any company strategy. It all comes down to accountability, efficiency, and having the data available for decision making,” says Piet Mouton, CEO of PSG Group.
Ansarada for greater governanceWith the proliferation of business data today, the strategy and tools used to manage and govern information must meet an increasingly thorough standard.
Make more informed impact investing decisions with a centralized platform that enables Boards and the C-suite to access real-time information and insights that will drive their strategies, help them maintain compliance, and mitigate ESG risks.
Ansarada OS is a platform for superior information governance across Deals, Board, Compliance and Tenders so that CEOs and the Board can get confidence and control.