Everyone is talking about ESG these days. But what exactly is behind it and how useful is ESG for the investment strategy?
What does ESG mean?
ESG can be summarized with the words environment, social and governance. The abbreviation stands for Environment, Social and Governance. Accordingly, companies undertake to comply with certain environmental standards as well as social and ethical regulations. ESG is nothing other than a contribution to a sustainable and environmentally friendly economy. The voluntary contribution that companies make to this goes beyond the legal requirements. Sustainable investment activity is also linked to this. Experts refer to this as socially responsible investing.
In the environmental area, the environment in which the company operates plays a role. Factors such as CO2 emissions, the proportion of renewable energies or compliance with certain environmental guidelines are measured. In the social area, factors such as human capital, product liability, wage agreements and compliance with anti-discrimination rules are decisive.
Corporate governance, i.e. management responsibility, requires compliance with ethical and moral rules. These include, for example, guidelines to prevent corruption, the prevention of money laundering or the implementation of an independent board of directors in the company.
The development of the ESG guidelines
Investors have already pursued various investment objectives in the past. These were not limited to achieving an appropriate return. In ancient times, they were often linked to political objectives. In the Middle Ages, investors hoped for a place in heaven through their investment objectives.
In the 1950s and 1960s, it was mainly trade unions that managed pension funds. With their investments, they aimed to create affordable housing or healthcare facilities. In the 1970s, due to the apartheid policy in South Africa, funds were set up that followed ethical guidelines.
At the turn of the millennium, there were funds that focused on social components in companies. Companies that pursued a fair social policy generally also achieved greater productivity. Employees worked more responsibly and with greater commitment.
ESG: The criteria and the rating
The ESG guidelines cover the following three areas:
- Environmental factors: Investments are considered in terms of their impact on the climate, resources and biodiversity.
- Social factors: These describe how a company deals with employees, health and safety, food security and demographic change.
- Supervisory structures: In the area of governance, risk management and the associated supervisory structures play a particularly important role.
The social return on investment (SROI) is used to illustrate and calculate these factors. This is a key figure that is similar to the return on investment (ROI). However, in addition to economic figures, it also takes social and ecological values into account. The respective criteria ultimately lead to the evaluation of the company in the form of an ESG rating.
ESG in the investment strategy: yes or no?
Companies with a strong ESG profile are generally considered to be more crisis-proof. They are generally characterized by promising and innovative business models. However, it goes without saying that even such companies are not protected from major price fluctuations.
Investment solutions with an ESG label are becoming increasingly popular, but the rating is not always transparent. As there are a large number of sustainability rating agencies that do not follow uniform standards, the meaningfulness of ESG is often questioned. The rating agencies weight the individual criteria very differently. It is therefore not uncommon for a company or financial investment to have a good ESG score with agency A, but only an average or even below-average ESG score with agency B.
The EU is currently striving to define uniform standards. However, there is still a long and difficult road ahead.
Another challenge is that the ESG guidelines focus on intangible and ethical values. This is very good in principle, but in most cases intangible values cannot be quantified at all or only with great difficulty. The social commitment of a company is difficult to express in figures. The same applies to other goals such as the preservation of biodiversity or food security.
A clear answer to the question 'ESG: yes or no?' is difficult. Our answer is therefore: Yes, but…
Sustainability and ethical principles as an investment incentive
So you have to decide for yourself whether you want to invest in sustainability, social commitment and/or innovation.
At Point Capital, we are convinced that sustainable business models and ethical behavior will always prevail in the long term. For this reason, we invest in innovative quality companies with sustainable business models. Such companies are very likely to be successful in the long term.
We have developed our own evaluation model for the selection of our quality companies. Among other things, we take into account issues that are also central to ESG. However, we do not rely on the reported ESG scores, but make our own assessment.
If you would like to find out more about Point Capital and our investment strategies, you can contact us at any time. We will be happy to advise you.
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