Investors must consider ESG factors

Responsible investment is an approach to investing that includes environmental, social and governance (ESG) factors into investment strategies. This is done to help better manage risk and generate sustainable, long-term returns.

“The long overdue push from shareholders for corporates to consider ESG factors is gathering ground,” says Mike Abbott, Director of Wealth at Sable International. Ethically minded investors are nothing new though.

Abbott explains: “The first ethical funds were launched back in the 1990s but access to these strategies was limited, exclusive and very expensive. The average retail investor wasn’t aware of their existence and certainly didn’t have access. All that is changing now at the very same time that ethical, environmental, sustainability and governance issues become frontline issues on the global agenda.”

According to Chris Potgieter, Head of Private Client Securities at Old Mutual, non-financial indicators – such as environmental, social and governance scores – should be considered by investors to be just as important as the financial indicators provided by balance sheets and earnings statements. “ESG scores – in particular, corporate governance – are indicators of both good management, which are one of best predictors of long-term sustainability and company performance,” Potgieter adds.

He cites, as an example, the case of Tesla’s Elon Musk reaching a settlement with the United States Securities and Exchange Commission (SEC) following charges of securities fraud. This is after Musk took to Twitter to announce this intention of de-listing Tesla, which resulted in the price of shares soaring to the to the detriment of short-sellers hedging on the stock’s decline.

According to a statement from the SEC, Musk was guilty of creating a misleading impression that taking Tesla, private was subject only to Musk choosing to do so and not a shareholder vote. The agreement means that Musk must pay a fine of $20 million, as well as step down as the chairperson of Tesla. The SEC also ordered the company to add two independent members to the board. Potgieter says that the news that Musk was permitted to remain in the role of CEO of Tesla came as a relief to many investors.

“However, his recent behaviour and the apparent inability of the Tesla board of directors to rein him in suggests that the chairperson’s disregard for the shareholders of Tesla presents a risk to the long-term sustainability of the company.”

Potgieter adds, “While the clean-energy electric-car maker is a company any socially responsible investor should love to invest in, the lack of action taken by the board in response to Musk’s recent behaviour highlights a potential problem with the management of Tesla and presents a significant governance risk to investors.”

He says anecdotally that Musk’s disregard for Tesla shareholders was also apparent the day he described Wall Street analysts’ questions at a recent meeting as “dry,” “boring” and “boneheaded”. Potgieter notes, “This incident was comparable to the day Jeff Skilling, the CEO of Enron – the once darling of Wall Street, whose demise shocked investors to their core – insulted a Wall Street analyst for asking why Enron refused to provide a balance sheet prior a shareholder meeting.”

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