Every company’s annual report now contains a section on how it is embracing all things ²ÝÝ®´«Ã½ (environmental, social and corporate governance). ²ÝÝ®´«Ã½ causes permeate every facet of a business’s output these days, keeping shareholders, clients and consumers satisfied that the company is doing its bit to save the world. Speaking out openly against anything ²ÝÝ®´«Ã½ related is akin to career suicide. . However, and whisper it quietly, the adoption of ²ÝÝ®´«Ã½ policies can come with a downside.
Yes, by embracing ²ÝÝ®´«Ã½-compliant strategies and policies, companies can often be doing themselves harm. This doesn’t mean to say that they should abandon these actions, but by acknowledging and identifying these problems they can be worked around, and hopefully result in a healthier balance sheet and a healthier planet.
Go deeper with GlobalData
Discover B2B Marketing That Performs
Combine business intelligence and editorial excellence to reach engaged professionals across 36 leading media platforms.
But which areas of ²ÝÝ®´«Ã½ adoption can damage a company or investor?
Minimising the investment universe
Responsible investors will often exclude certain sectors from their portfolios, such as tobacco, alcohol, weapons and fossil fuels. This is mostly done for ethical or . It can also, however, limit an investor’s options. By excluding certain sectors from their portfolios, investors can run the risk of focusing on too narrow a group of industries, which might score well in terms of ²ÝÝ®´«Ã½ credentials but lack the diversification needed to ride out tougher economic times.
Impact on financial performance
There are concerns that there are trade-offs between ²ÝÝ®´«Ã½ compliance and financial performance. Some investors fear that ²ÝÝ®´«Ã½ investments generate smaller returns than those that focus less on such issues. As a result, some investors worry that they are compromising on returns in favour of a better ²ÝÝ®´«Ã½ performance.
A focus on ²ÝÝ®´«Ã½ could come at the expense of other business concerns
. There are numerous regulations that are designed to encourage greener global habits and slow down the negative impacts of climate change.
However, the pressure to ‘go green’ in both governance and investment is easier to implement in some places than it is others. Many developing economies rely heavily on fossil fuels and do not have the resources to speed up a transition to renewable energy. If pressure is continually placed on the environmental part of ²ÝÝ®´«Ã½, particularly within developing countries, the social or the governance parts could suffer.
Africa provides an example of this problem. If Western investors push too hard for a decarbonisation agenda in Africa and rule out all fossil fuel investments in the continent, then and it could take a lot longer to lift millions of Africans out of poverty.
Defining ²ÝÝ®´«Ã½-compliant investments can be subjective
Defining the dos and don’ts of ²ÝÝ®´«Ã½ investing can be subjective. As an example, for many years. However, the , pushing investors to rethink their policies when it comes to the defence sector. Several investors are now considering investments in the defence industry because it is currently seen as a key sector for security reasons and/or in assisting Ukraine’s fight for its freedom. This shows how quickly sentiments can change towards an industry and how it complies with ²ÝÝ®´«Ã½ thinking.
Accusations of greenwashing
Greenwashing is another problem that can arise through ²ÝÝ®´«Ã½ investing. Due to the increasing interest in all things ²ÝÝ®´«Ã½, some companies and investors have been known to very publicly be seen to embrace such practices in order to attract more clients but fall some way short when it comes to providing any actual evidence of . As a result, several companies have been called out for greenwashing, which has damaged their image and reputation.
This has been a particular issue with oil and gas companies that have stated that they are , while in reality they were increasing them. There have also been numerous cases of financial services companies misleading investors about the size of green assets they have under management.
²ÝÝ®´«Ã½ is still good for business, however
In spite of the issues listed above, the advantages of ²ÝÝ®´«Ã½-compliant strategies will typically outweigh the disadvantages for a business. Such an approach tends to result in a more profitable company that is better prepared for any future shock events.
, for example, shows that companies with high gender diversity within their board of directors have been more profitable than those with less.
Additionally, a global survey shows that 71% of employees and employment seekers consider environmentally sustainable companies to be more attractive employers.
Embracing a meaningful ²ÝÝ®´«Ã½ agenda (and not just seeing it as a tick-box exercise) is something that no company can sidestep. Yes, there are some difficulties and disadvantages associated with some aspects of ²ÝÝ®´«Ã½ compliance, but these can be worked around. Most of these problems are of a short-term nature too. , and businesses approaching the topic as a sprint and not a marathon are the ones that will suffer.
