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The ‘SG’ in ESG: why it matters

Daniel Lane

Daniel Lane - Fidelity Personal Investing

I popped into my local wine shop yesterday and thought I’d go for some of the plonk-on-tap they make themselves. Not possible, I was told, because I didn’t bring my own bottle to fill up.

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I love this idea, and could go on about the behavioural economics on show, but when I got talking to the owner I found the aim wasn’t to keep costs down. This was his small individual effort to make the business more sustainable, environmentally friendly and waste-conscious.

Someone else who has adopted this attitude on a grander scale is climate activist Greta Thunberg. The Swedish teen’s choice to sail the Atlantic over flying, as a personal rejection of the carbon footprint aviation carries, represents a wider climate-focused consciousness coming through.

And while older generations may struggle to accept a 16 year-old leading from the front, the world is slowly changing in her favour.

Electric vehicles, international emissions caps and veganism are now beyond novelty. On the last one, vegan meat replacement products and cultured meat (give it a Google) are expected to grow in uptake by 9% and 41% a year until 2040, according to the United Nations and World Bank. Over the same period, the consumption of conventional meat is predicted to decline by 3% each year.

And if it still sounds like a flash in the pan, you might be pitting yourself against the likes of Bill Gates and Leonardo di Caprio who have sunk considerable capital into plant-based and vegan food companies including Beyond Meat and Impossible.

When large demographic shifts allow investors to match their money with their morals, the result can be revolutionary. However, this is a perfect time to remind ourselves that all of the above only addresses the ‘E’ in ESG. While we tend to lump sustainable investing in with the environment and so, often with specific investors’ needs, the other two letters should matter to us all, no matter if you are a wine shop owner or Greta Thunberg.

Social standards, or how companies treat their workforce, customers and the rest of us, are paramount. Perhaps due to Brexit and US-China trade wars, we are more cognizant than ever before of the human involvement in global supply chains. Shoddy practices, dangerous factories and low levels of employee care won’t cut it anymore.

And while this may seem virtuous, in a pragmatic sense investors need to realise that the wider investment community is waking up to the fact that sooner or later, these sorts of substandard businesses get found out. And that means scandals, fines and revenue loss. You don’t need to be an activist to want sustainable earnings growth and revenue streams.

In the same vein, close attention to high standards of corporate governance will rarely hurt a company. And with investment firms expecting these standards as a given, firms fail to demonstrate progressive behaviour at their peril. Whether it be increasing female or minority representation in the C-suite or putting a more reasonable time frame on executive long-term incentive plans, we’re expecting more from companies now. For the next generation, this all has to come as standard.

Visit the ESG investing hub

Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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