The importance of ESG and its criteria for investment

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Responsible investing, which has been around for over 30 years under the umbrella of socially responsible investing (SRI), encourages an integration of the environmental, social, and governance (ESG) factors to be strongly considered during the investment decision-making part of the financial analysis. For quite some time and in many cases, a cornerstone obligation of the investee company was to maximize short-term returns for shareholders, without regard for ESG factors. ESG investing goes beyond a three-letter acronym to address how a company serves all its stakeholders: workers, communities, customers, shareholders, and the environment, with many individuals making investments that are most aligned with their priorities.

Hence, the ‘responsible investment’ movement has now given rise to the ESG concept, which is increasingly becoming part of shareholders’ fiduciary obligations. According to a KPMG report, 55% of CEOs believe it is their responsibility that if they are to achieve sustainable, long-term success, their companies must look beyond purely financial growth. So, it comes as no surprise that Schneider Electric is among the earliest adopters of ESG commitments, making unwavering commitments to the planet and society leadership, taking ownership and charting a sustainable path forward in partnership with businesses of all shapes and sizes.

In recent years, Schneider Electric has accelerated its commitments to sustainability and, as a result, ranked number 1 out of more than 8,000 businesses by Corporate Knights.

Schneider Electric has been steadily pivoting towards products and services that help their customers manage energy with greater efficiency and safety. It considers sustainability as a vital part of its business model and invests heavily in its sustainability initiatives. This has a domino effect on the industry and inspires competitors to do the same and embrace ESG.

One significant component of the sustainability goals is to reduce the impact on local water supplies and eliminate the discharge of waste to the environment, this means companies are looking to non-core assets, for example wastewater treatment facilities as core-ESG assets in order to achieve sustainability goals. In addition, leveraging technology created by Schneider Electric enables companies to better measure performance of energy and water assets, bringing great visibility to the governance of environmental performance.

In a discussion with VICO Infrastructure Company LLC, which exists to invest in innovative technology and promote practices that reduce water and energy usage, CEO Brian Cullen stated “VICO is very committed to developing and managing water and related energy infrastructure that delivers better ESG outcomes to companies. Leveraging Schneider Electric’s technical solutions enables VICO to have greater visibility of environmental results and to provide more transparency of performance to our clients” Learn more about VICO’s mission here: https://www.vicoinfrastructure.com/about

This guide emphasizes the importance of ESG from the perspective of businesses and discusses some of the best practices associated with them

Why is ESG Important from a Business Viewpoint?

There are numerous benefits of pursuing a high ESG performance for organizations:

Enhanced Performance: If you’re of the view that adopting ESG can diminish your performance, you’re misinformed. According to research by Amundi, a leading asset manager, the company’s portfolios with high ESG scores performed much better than others between 2014 and 2017.

Attracting Investors: In the current scenario, more and more investors are becoming environmentally conscious and are choosing socially responsible companies for investments. With good ESG scores, you should also attract green investment funds relatively easily. Sustainable investing is surging, accounting for 33% of total U.S. assets under management: Sustainable Investing Stats.

Positive Impact: Corporates able to demonstrate positive impact appeal to ESG stakeholders including shareholders, employees as well as business partners and customers. With increased awareness and higher expectations relating to sustainability, it is essential to do so in a tangible and transparent way. Schneider Electric for instance is recognized for its best in class Schneider Sustainable Impact (SSI) dashboard – initially launched in 2014 and refreshed every few years since, to enable concrete target setting, effective monitoring and fast progress on bold ESG targets. At the start of 2021, the company released its 2021-2025 SSI goals, including a bold commitment to save and avoid 800M metric tons of CO2 for its customers. An announcement which was positively received by its internal and external stakeholders.

Innovation: An emphasis on ESG may foster innovation and tech advancements, such as the adoption of renewable infrastructure and technology to minimize carbon emissions. This leads to innovation and improved efficiency.

Better Results: According to Morgan Stanley Capital International (MSCI), companies with high ESG scores report lower market risk, less volatile earnings, and low cost of capital.

Let’s now take a look at the ESG criteria:

ESG Criteria

Each of the elements of ESG investing, namely environmental, social, and corporate governance, has its own criteria for investors. We’ll discuss them individually:

Environmental

Environmental criteria take into account how a firm handles potential issues of water or air pollution triggered by deforestation, operations, and other activities with respect to the problem of climate change. It also considers the organization’s use of renewable energy sources and its waste management program.

Social

This element covers a myriad of issues related to social relationships. One key area is organizations’ relationships with their employees. The criteria cover compensation, benefits, working conditions, training programs, and other employee-related aspects when compared to similar jobs in the industry. Simple actions like offering a lavish buffet lunch to employees once a week, a fitness center at the workplace, etc., mean a lot to investors. These aspects can make a huge difference to the evaluation of a company.

Likewise, policies related to sexual harassment, diversity, and inclusion are also often considered. A high employee turnover gives a negative image of a company. The criteria also assess the firms’ stance on human rights and their customer relationships.

Corporate Governance

In the context of ESG, corporate governance has to do with how the top floor executives manage companies. It considers how the board of directors and top management address the interests of other stakeholders. Among the key elements of good corporate governance include honest and full financial reporting and accounting transparency.

For many ESG investors, executive compensation is a major concern. Typically, they won’t approve of multi-million-dollar bonuses for executives when the rest of the employees have a fixed salary. As per the corporate governance criteria, the extra compensation for executives must reasonably tie to the viability, profitability, and increasing long-term value of the company.

Conclusion

By now, you should have developed a clear understanding of the importance of ESG in the energy sector. Based on the criteria you studied, develop an ESG-based program that doesn’t just benefit the overall society but also attracts investors. By taking into account the implications for the environment, your social relationships, and emphasizing corporate governance at top management levels, you should help your company score high on ESG.