Brendan Bradley - ESG Investing For Dummies

Furthermore, many of the points suggested here for money managers will be similar for individual companies implementing their own ESG policies.

It may sound obvious, but investigating how your peers have communicated their ESG policies can be invaluable. This is because given policies may be more applicable to given industry sectors or geographical locations, while there may be specific elements that could be followed or excluded, depending on the specifics of your company.

This is an appropriate time to identify and review the core beliefs and principles that are central to your organization. Your ESG policy should be informed by these beliefs and your strategic investment approach. It’s also appropriate to identify and reflect on your organization’s culture and values so that they are adequately represented in the resulting policy. Note that without well-defined core principles, trustee and fiduciary oversight and accountability mechanisms are very difficult to implement.

Recognize the responsible investment practices that leverage your organization’s investment process and philosophy, and consider how your policy will relate to both internally and externally managed assets. Moreover, analyze jurisdictional specificities and legal aspects that could affect the guidelines .

There should be minimum ESG standards that your organization expects investee companies to follow. These standards may initially constitute a high-level statement on ESG goals but should ultimately include specific details on how companies need to manage particular issues and adhere to established standards. Differing guidelines and procedures may vary across different asset classes, including listed equities, bonds, private equity, real estate, hedge funds, and commodities. Specific guidelines could be devised for the asset classes that you regularly invest in, while the policy could be more generally applied to emerging asset classes. External investment managers should be expected to have their own ESG policy in place or agree to adopt the asset owner’s policy. Ultimately, guidelines on manager selection and monitoring could include ESG expectations in the Request For Proposal (RFP) and requirements on reporting of ESG issues.

This part of the policy should outline which ESG approaches your organization will implement. These approaches could include positive and negative screening, ESG integration, themed investing, and active ownership. Further elaboration on specific sustainability themes or what you’ll abstain from investing in should be outlined, along with the thinking behind those approaches. Additional information on impact investing could be incorporated here. Last but not least, there should be clear guidelines on how ESG issues will be integrated into the investment analysis and processes across different asset classes.

Depending on the stance of your organization, it may be appropriate to include proxy voting and engagement guidelines in your ESG policy. This should include some general guidelines on what ownership activities you’ll use or prioritize. These activities could include annual general meeting (AGM) participation and proxy voting, ongoing engagement with the investee companies, addressing specific issues around raising shareholder resolutions, and requesting a seat on the board.

This section could also be used to clarify responsibilities — for example, whether ESG integration will be covered in-house or by external managers. Likewise, will active ownership activities be administered by internal staff or outsourced? Just as important, who will supervise the range of activities undertaken by different actors within this approach?

In today’s environment, it would seem a best practice to report on your ESG activities to both beneficiaries and more publicly (if only on an aggregated basis across various clients). However, the guidelines outlined earlier should clarify how, when, and to whom reporting will be made, as well as the associated level of publicity. There should certainly be clarity around expectation in terms of reporting from portfolio managers, external engagement, and proxy voting. Finally, review processes should be put in place to ensure that objectives are being met and that analysis of the Key Performance Indicators is undertaken to measure whether ESG expectation outcomes are being met.

Chapter 3

IN THIS CHAPTER

Understanding a company’s natural resource usage

Highlighting effects of company operations on the environment

Seeing how “green” a company is and its mitigation measures

Recognizing stewards of the physical environment

Investors are becoming increasingly aware of the financial impact of environmental issues on companies in their portfolios. These investors are paying greater attention to issues such as climate change, water usage, energy efficiency, pollution, resource scarcity, and environmental hazards so that they can increase awareness of relevant issues and influence disclosure. The negative impact for companies failing to manage environmental risks includes increasing costs (for example, the need to clean up oil spills), reputational damage due to pollution incidents, and litigation costs.

Integrating environmental factors into a company’s strategy can present opportunities — for example, using resources efficiently can decrease costs and offering innovative solutions can create a competitive edge. These environmental factors measure a company’s impact on living and non-living natural systems, including the air, land, water, and entire ecosystems. These factors also indicate how a company employs best management practices to avoid environmental risks and capitalize on opportunities that generate shareholder value.

This chapter outlines how companies manage their natural resource usage both directly and indirectly through their value chain. It also describes how analysis of these factors allows investors to determine whether the companies are meeting their environmental stewardship targets or managing the risks involved. Numerous environmental issues can be relevant to different companies in diverse sectors of the economy, but this chapter focuses on the material issues that both companies and investors need to consider, as such issues may have the greatest impact on both return on investment and sustainability.