ESG: The 3 pillars of responsible investing

The traditional capitalist notion that profit is all a company should worry about – as advanced by US economist Milton Friedman and proponents of his free-market approach in the 1970s and 80s, led by – is dead. A softer, more “caring” capitalism has taken its place, which sees companies in the broader context of the human and natural environment in which they operate. The responsible investing movement, whereby investors are driving change, is based on three pillars: environment, social factors, and governance.

1. ENVIRONMENT

A company must consider its impact on the environment and, if harmful, reduce it to within accepted norms.

The current focus, because of the urgency of climate change, is on carbon emissions, where almost all companies can make cuts.

But environmental impact goes much further: chemical pollution of rivers, degradation of natural wildlife habitats, deforestation, plastic pollution in our oceans ... companies need to take responsibility and “clean up” their act.

2. SOCIAL FACTORS

A company has responsibilities to various groups of people, not just its shareholders. There are the company’s customers, its suppliers, its employees, and the people in the community within which it operates, who may be indirectly affected in some way or another by its actions. Most corporates in South Africa have social upliftment programmes in less-privileged communities, although a cynic might view these as little more than a PR exercise. More attention could be paid to how these companies treat their employees.

3. GOVERNANCE

This relates to how a company is managed and governed – by its executives and ultimately by its board. South African companies are guided by the King IV Report on Corporate Governance of 2016, which calls for, among other things, honesty and transparency in dealings with stakeholders, fair remuneration of employees, transparency of accounting, and ethical business practices.

Institutional investors see governance as a critical area in which they can be influential in doing good.

The traditional capitalist notion that profit is all a company should worry about – as advanced by US economist Milton Friedman and proponents of his freemarket approach in the 1970s and 80s, led by – is dying.

A softer, more “caring” capitalism is taking its place, which views companies in the broader context of the human community and natural environment in which they operate. The responsible investing movement, whereby investors are driving change at company level, is based on three pillars: environment, social factors, and governance.