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Money talks: ESG is changing investing

ESG (environmental, social and governance) has become a hot topic in business in recent years as consumers and investors demand more from companies than just products, services and economic performance.

Industry West caught up with Addenda Capital president and CEO Roger Beauchemin to talk about ESG and investing, and what it means for businesses and investors.

“For us, ESG investing means we use non-financial factors to broaden our financial analysis, which allows us to better assess risks and opportunities,” says Beauchemin. “ESG factors may have a material impact on companies with respect to elements such as valuation and conduct.”

The E

When it comes to the E in ESG—environmental—science proves that this factor has a significant impact on company performance. Companies with strong environmental practices, such as commitments to carbon reduction, better waste management and renewable energy use, are more likely to be viewed as more resilient, responsible and stable, especially as regulatory requirements push for sustainable practices. Plus, investors are making demands on companies to prove their environmental commitments for both social and financial reasons.

The S

The S, social, is not far behind in proving its value like the E. DEI (diversity, equity and inclusion) is gaining momentum in business, and forcing organizations to make decisions about how they work and who works with them. “We’re seeing firms outperform others because of their commitments to DEI,” says Beauchemin. “Having a leadership team and workforce that is made up of different cultures, backgrounds and perspectives, plus treating staff and vendors well, leads to better financial performance.” Strong social practices also extend to product safety, community engagement and good labour relations, which contribute to both the bottom line and society as a whole.

The G

Governance, the G in ESG, also plays a major role in investing and performance. Beyond diversity in labour, governance looks at an organization’s leadership, transparency and accountability. Factors such as the composition of boards, executive compensation and conduct play a major role in evaluations for ESG investments, and overall performance. “Over time, good governance can be correlated with improved performance,” says Beauchemin. A well-run company will show that in their financial performance, plus companies with good governance practices are often better at risk management, long-term planning, and provide greater accountability to their stakeholders.

Bringing the letters together

“ESG lets investors analyze companies with more information. It provides a well-rounded perspective and allows for better risk/reward decisions,” says Beauchemin. “It also lets investors align their money with their values. Plus, it pushes companies to do better.”

Beauchemin points to the energy sector as an example. As the world makes the transition to renewable energy and commits to carbon reduction, traditional energy companies can use ESG commitments as part of their pivot away from fossil fuels. Investors and debt holders can work with companies to make the necessary changes that the market demands while using their capital to support important non-financial impacts.

Making it happen

For companies looking at their ESG performance, disclosure is key. Beauchemin says that more demands are coming for how ESG is communicated and proven. “The U.S. Securities and Exchange Commission and regulators in the European Union are becoming more demanding toward asset managers, for instance, about proving ESG claims,” says Beauchemin. Documentation is required beyond financial reporting to show that commitments made are followed through. “In this regard, there is a need to be aware and honest about claims, and to acknowledge that not all assets will be aligned right away. ESG is a journey, not a destination.”

Looking ahead

ESG investing is not a trend as it gains momentum day by day and year by year. Investors are gaining confidence in reviewing non-financial factors when making decisions, knowing that ESG performance has a direct impact on their portfolios. Companies with strong ESG commitments often see greater financial performance long-term and are better able to handle market changes, attract talent and have better relationships with vendors, clients and other stakeholders. Plus, investors are more committed than ever to putting their money where their values lie.

“Ultimately, it’s about common sense and good business,” says Beauchemin. “When you’re doing things right and doing good things, you’re running a good business. That’s what investors are looking for.”