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Environmental, social and governance criteria

Nowadays the company’s financial performance is not the only factor influencing investors’ decisions. There are other variables that investors use to assess companies’ operations and that can affect their economic results.

Global sustainability challenges such as flood risk and sea level rise, privacy and data security, demographic shifts, and regulatory pressures, are introducing new risk factors for investors that may not have been considered previously. For example, they are becoming much more educated and sensitive to Environmental, Social and Governance (ESG) aspects.

ESG criteria consist of a number of standards to run a company used by socially and environmentally conscious investors/consumers in their decision-making process. ESG criteria can be seen as a way to assess a company’s ethical impact and sustainable practices. Examples of ESG criteria used by investors include determining a company's impact on climate change or carbon emissions, water use or conservation efforts, anti-corruption policies, board diversity, human rights efforts and community development. This kind of information can be found in apposite sections of the company’s annual report, although the corporate social responsibility and environmental sections are rarer, especially in locally-listed companies.

Rather than gauging the advantage of following ESG criteria, which could be perceived as costly by the company, one should think about the disadvantages related to their lack of implementation.

This was evident in the case of Facebook, whose shares price lost 17.8 per cent after the scandal of Cambridge Analytica, or in the case of Volkswagen after the 2015 emissions scandal, whose share price lost 56 per cent. Today, what makes the difference in a competitive environment, ceteris paribus, is the level of effort put in addressing environmental and social issues and in general addressing satisfying as many stakeholders as possible (including, employees, communities, public authorities/entities, etc...).

ESG criteria have also been formalised as investment criteria in what is known as ESG investing. Including ESG criteria within investment criteria aims to direct more capital towards sustainable investments and can contribute to more stable financial returns. Indeed, some studies suggest that companies with robust ESG practices displayed a lower cost of capital, lower volatility, and fewer instances of bribery, corruption and fraud.

The amount of assets under management which are invested following ESG criteria is increasing. For example, since its launching in 2006, the United Nations Principles for Responsible Investing has obtained over 1,800 signatories representing more than $68 trillion as at April 2017, who have committed to incorporate ESG criteria into their investment analysis and decision-making process.

Disclaimer:
This article was issued by Elisabetta Gaudiano, research analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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