ESG criteria, a tool for understanding the changes in our society
Taking account of environmental, social and governance (ESG) has become a necessity for management companies, by Marie-Pierre Peillon, Research and ESG Strategy Director
Taking account of environmental, social and governance (ESG) has become a necessity for management companies. In a world in upheaval as a result of energy, digital and demographic transitions, ESG represents an ideal tool for understanding the major transformations at work within companies. This approach must however be accompanied by a shareholder commitment policy.
The world is experiencing a paradigm shift. Will the short-termist perspective, which has long prevailed on financial markets, be able to give way to a medium- and long-term outlook? The growing development of sustainable finance during the past decade – through SRI (socially responsible investment) funds or integration of environmental, social and governance (ESG) criteria – is definitely a factor in this phenomenon. This transformation of finance must now be part of a long-term strategic approach and widespread integration. With good reason: the short-termism of the financial markets, which has profoundly changed management of companies and their governance, represents a genuine source of financial risks. In order to develop a new medium- and long-term model, ESG has rapidly established itself as a suitable toolbox for anticipating and understanding these multiple risks.
Three transitions to be managed
2015 however represented a major turning point for sustainable finance, under the impetus of the COP 21 and the Paris Climate Agreement on the one hand and publication of the Sustainable Development Goals by the United Nations on the other. Management companies and first and foremost managers were no longer able to ignore this tidal wave, a further major step in the paradigm shift in financial markets. In France, entry into force of article 173 of the Energy Transition Act has further accelerated the change in mentalities, particularly among institutional players who are now calling for application of ESG criteria in stock picking. Civil society is also encouraging all financial players to become more involved and adopt a new vision of finance and investment. Under the increasing impetus of the “Millennials”, investors will have an increasing desire to give meaning to their savings and thus seek a financial performance of their investments combined with an environmental and societal performance in line with their values.
Against this background, ESG analysis has also evolved from being merely a risk measurement tool into an instrument for identifying new investment prospects. In a world in turmoil, management must indeed be capable of understanding the changes in our society and of identifying not only the new risks but also the new sources of financial investment. The aim is to address the three major transitions that are changing the business models of all companies today:
- energy and environmental transition, requiring a shift towards a low-carbon economy, with challenges in terms of coping with the environmental impacts of company activities;
- digital transition which, with the advent of “big data” and the rise of artificial intelligence, will have an impact on the entire value chain of companies in all sectors of the economy;
- Finally, demographic transition, a crucial issue in a world facing an ageing population, increasing urbanization and rising social and/or wage inequalities within companies. Human capital management is becoming even more of an imperative for any company.
A policy of targeted commitment
In order to be able to take up these three major challenges, a generalized, cross-sectional approach at the management company level is required. This approach must indeed be the product of a strongly held conviction on the part of General Management that is extended to all the teams. In addition, having extra-financial analysts is an essential but inadequate first step. It is also imperative to combine this extra-financial analysis with financial analysis within one and the same team. Such an approach makes it possible to complete the financial diagnosis of a company, obtain an overall view and take better account of its medium- and long-term industrial and commercial strategy. This alliance allows review of medium- and long-term investment and management approaches.
Taking account of ESG criteria cannot however be merely restricted to investment analysis and decision. It must also take the form of a policy of voting and commitment among companies. In this respect, we consider it wise to adopt a shareholder commitment approach. The issue is straightforward: being as close as possible to companies in order to assist them in improving their own ESG practices. This shareholder commitment must be structured around individual measures adopted by the company, through recurrent dialogue with “top management” concerning these ESG topics. Finally, it also seems necessary to have collective measures in market initiatives or through platforms such as the Principles for Responsible Investment (PRI). As a multidisciplinary approach, ESG clearly appears to be a necessity in accompanying the paradigm shift taking place on the financial markets.
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