What is ESG?

ESG stands for Environmental, Social and Governance. There is growing evidence that suggests that ESG factors, when integrated into investment analysis and decision making, may offer investors potential long-term performance advantages. ESG has become shorthand for investment methodologies that embrace ESG or sustainability factors as a means of helping to identify companies with superior business models.

ESG factors offer portfolio managers added insight into the quality of a company's management, culture, risk profile and other characteristics. By taking advantage of the increased level of scrutiny associated with ESG analysis, ESG Managers® Portfolios seek to identify companies that we believe:

  • Are leaders in their industries
  • Are better managed and are more forward-thinking
  • Are better at anticipating and mitigating risk
  • Meet positive standards of corporate responsibility
  • Are focused on the long term

As the chart below suggests, a company's ESG activities have the potential to positively impact its financial performance over the long term.

Area of focus

Activity

Potential impact on financial performance

Environment
  • Resource management and pollution prevention
  • Reduced emissions and climate impact
  • Environmental reporting/disclosure
  • Avoid or minimize environmental liabilities
  • Lower costs/increase profitability through energy and other efficiencies
  • Reduce regulatory, litigation and reputational risk
  • Indicator of well-governed company

Social

Workplace

  • Diversity
  • Health and safety
  • Labor-Management relations
  • Human rights
Product Integrity
  • Safety
  • Product quality
  • Emerging technology issues
Community Impact
  • Community relations
  • Responsible lending
  • Corporate philanthropy

Workplace

  • Improved productivity and morale
  • Reduce turnover and absenteeism
  • Openness to new ideas and innovation
  • Reduce potential for litigation and reputational risk
Product Integrity
  • Create brand loyalty
  • Increase sales based on products safety and excellence
  • Reduce potential for litigation
  • Reduce reputational risk
Community Impact
  • Improve brand loyalty
  • Protect license to operate

Corporate Governance
  • Executive compensation
  • Board accountability
  • Shareholder rights
  • Reporting and disclosure
  • Align interests of shareowners and management
  • Avoid negative financial surprises or “blow-ups”
  • Reduce reputational risk

Past performance does not guarantee future results.

1Goldman Sachs – Goldman Sachs Global Investment Research, “Overview: Introducing GS SUSTAIN,” July 2, 2007.

2Innovest – Innovest Strategic Value Advisers, "Carbon Beta and Equity Performance: An Empirical Analysis: Moving from Disclosure to Performance," October 2007.

3CRA RogersCasey – United Nations Environment Programme Finance Initiative, Show Me the Money: Linking Environmental, Social and Governance Issues to Company Value, Asset Management Working Group, 2006

Research confirms the value of the approach

A growing body of research by such respected companies as Goldman Sachs, Innovest and others points to the long-term materiality of ESG factors on investment performance. Consider these comments:

“Companies that are considered leaders in ESG policies are also leading the pack in stock performance by an average of 25%.” —Goldman Sachs1

“There is increasing evidence showing that superior performance in managing climate risk is a useful proxy for superior, more strategic corporate management, and therefore for superior financial value and shareholder value-creation.” —RiskMetrics2

“[We] were impressed by the quantity of reports that showed a strong link between ESG issues, profits, business activities and, ultimately, stock prices.” —United Nations Environment Programme Finance Initiative3