The impact of ESG on investment decisions

Mar 06, 2017
<p>Erika Karp, founder and CEO at Cornerstone Capital Group, talks about the role of ESG in buying and selling decisions</p>

This article was produced by ELITE Connect and originally published on the ELITE Connect platform

As investors and the shaping of their investment priorities continue to become increasingly influenced by ESG factors, IROs face a growing need to understand and communicate their ESG story effectively. Here, Erika Karp, founder and CEO at Cornerstone Capital Group, gives us an insight into the landscape from the buy-side perspective. 

ELITE Connect: What are the main ESG factors influencing investment decisions?

Erika Karp: ESG factors are a starting point for critical inquiry. Material ESG factors have important implications for risk, risk reduction and opportunity in the long term and they must be viewed in the context of the particular sector and company being analyzed. A critical and holistic approach means investors are focused on governance issues, and a lack of good governance could have negative implications for shareholder returns.  

Similarly, environmental issues related to reducing potential environmental risk that could negatively impact shareholder value, such as having policies and infrastructure in place to (for example) prevent oil spills, are critically important. More broadly speaking, transparency in corporate operations (such as supply chains) can potentially signify good governance.

EC: How has the ESG landscape changed over the last 12 months?

EK: It is playing a greater overall role in decision-making throughout the corporation but especially within the C-suite. We have seen several ESG disasters in the market – Volkswagen (environmental and governance failure) and Wells Fargo (governance failure) are just two examples. There has been a greater recognition among investors that ESG considerations carry real risks that can be financially detrimental to shareholder value. 

As such, ESG factors are being integrated more often and earlier into decision-making processes, and are playing a greater role in investment overall. Overwhelming empirical evidence is showing that integrating ESG into the investment process allows for competitive, if not better, financial returns.

EC: What do you see as being important ESG factors in the future?

EK: Environmental factors will become even more important, particularly in the US where there is likely to be a loosening of environmental regulations on the regulatory front, so strong environmental policies will become an important substitute for legal requirements. To go back to the oil spill example, a spill will still have negative implications on shareholder returns as it will cost the company additional money to clean up, as well as presenting reputational risk, but could become more likely in the absence of regulation. In the absence of regulation to reduce this risk, stronger environmental policy will be needed to mitigate the probability of occurrence and the risk to owners if it does occur.  

EC: How can IROs best communicate ESG topics to investors?

EK: Having a set of consistent metrics that can be evaluated over a time period is very important. This way, investors will have an opportunity to evaluate progress against a consistent yardstick and will be better able to judge the progress of a company in ESG-related areas. Similarly, integrating ESG commentary into other parts of financial reporting (rather than carving out a separate ESG section) is important to legitimizing ESG concerns.  It should be part of the management discussion & analysis section along with the strategic and financial analysis of the business.

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