With All the Noise, How Do You Know the Time is Right to Include ESG?

Guest Blogger: Joe Holman, CEO, ESG Administration

When is the right time to consider implementing an ESG framework? Today and for newly emerging funds, it is more important than ever to consider ESG on day one.

Investors who control the world’s investable assets consider ESG policies as essential as compliance and cybersecurity. The double-digit YOY growth reported by UN Principle for Responsible Investment (PRI) supports this assertion. For fiscal year-end 2021, PRI reported $121 trillion of AUM, a 24% YOY increase in signatories who use ESG in their investment process. And who are PRI signatories? They are every relevant institutional investor worldwide.

Attributes of a well run Company:

• Respect the environment
• Value their employees
• Promote diversity
• Act as good corporate citizens
• Maintain strong corporate governance

Before explaining why today, let’s look at what is meant by ESG. First, an ESG policy does not make the fund an ESG fund. For most managers, an ESG policy means the fund uses ESG data to mitigate downside risk and identify long-term opportunities. The premise is well run companies, over time, will outperform poorly run companies. Investment analysts incorporate non-financial ESG data alongside a traditional financial analysis in their buy-sell recommendations. And post-investment, continue to engage companies on ESG matters, encouraging them to be better. This form of ESG is known as ESG Integration and is used by the vast majority of funds that have an ESG policy.

Examples of ESG Integration include:

A company has an aggressive growth plan and needs to implement a robust employee recruitment, retention, and training strategy to support its growth. By considering diversity, childcare, and hybrid work arrangements, the company can make itself an employer of choice and thus grow the workforce to support its top line. Or ignore these factors and face excessive turnover or, worse, a decrease in customer satisfaction.

Another example is a company where energy costs are material. (i.e., real estate). By considering ways to reduce energy consumption, the company can increase bottom-line results. And by considering renewable energy sources, they may be able to lower energy costs while avoiding price spikes associated with fossil fuels.

Every company has ESG risks and opportunities. And it’s the ESG policy that dictates how these ESG factors are document, identify and incorporate into the investment process.

So why today should investment funds implement an ESG policy? The reasons are simple, having a policy on day one shows your awareness of the importance of ESG, and it’s easier to implement an ESG strategy in the beginning rather than wait until investors demand one.

An ESG Integration strategy supplements the investment process to help managers identify sources of risk and long-term opportunities. This strategy is appropriate for managers of all sizes and strategies, so the real question is, why wouldn’t a manager implement an ESG policy today?

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About the Author:
Joe Holman founded ESG Administration and has over 25 years of experience in the financial services arena. His unique understanding of the investment community allows him to help managers implement ESG without disrupting their investment process. Mr. Holman is a New York CPA and a Sustainability Accounting Standards Board (SASB) credential holder. He earned his MBA from Rutgers, the State University of New Jersey, and is currently studying for an M.S. in Sustainability Management at Columbia University. If you would like to contact Mr. Holman, he could be reached at joe.holman@esgadmin.com