By now, you may already know that some investors use environmental, social, and governance (ESG) data to understand a company’s impacts outside of purely financial measurements. But companies pay attention to ESG too, and many try to shape their own ESG impact through something called an ESG policy.
The returns on a portfolio consisting primarily of Environmental, Social and Governance (“ESG”) aware, impact investing, or faith-based investments may be lower or higher than a portfolio that is more diversified or where decisions are based solely on financial considerations. Because ESG criteria exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria.
An ESG policy is an official commitment that companies make in order to manage their ESG impacts. A company with an ESG policy will often set goals for how it wants its business to perform across environmental, social, and governance categories.
Sometimes, a company will make several official commitments that fall into its ESG policy, like a “sustainability policy,” “sustainable development goals policy,” “corporate social responsibility policy,” or “governance policy.” Although these can be narrow in focus, commitments made in those guidances often affect a company’s overall ESG impact.
In the eyes of ESG advocates, adopting an ESG policy is simply good business practices. But there are a handful of reasons why a company may want to consider instituting an ESG policy.
One reason is that it communicates to investors that the company is serious about ESG. Earlier this year, Bloomberg Intelligence analysts predicted that global ESG assets could surpass $41 trillion in 2022. Although that number may be off due to this year’s downturn in the market, the report also predicted that number could grow to $50 trillion by 2025 — showing a growing interest in ESG by investors. A company may want to show its ESG worthiness to ESG conscious investors, so adopting an ESG policy could help do that.
Another reason to adopt an ESG policy comes down to risk management. Traditionally, good performance across ESG categories has been linked to minimizing a company’s exposure to business risks. How? Reducing exposure to fossil fuels can be useful in a rapidly decarbonizing world, adamantly avoiding polluting can help a business steer clear of government fines, appropriate employee management can help companies attract new talent and stay away from scandals, and proper governance can help prevent fraud. Scenarios like these show tangible business reasons for adopting ESG policies — beyond simply “feeling good” about one’s impact.
It should be no surprise that many of the largest publicly traded companies have already instituted ESG policies. Let’s take a look at some of them to understand what an ESG policy looks like in practice.
(Note: the companies included in this list have been picked due to their large market capitalization. This should not be seen as an endorsement of whether or not to invest.)
Instead of outwardly calling out a singular ESG policy, tech giant Microsoft discloses its several commitments to corporate social responsibility. These commitments include a policy on environmental sustainability, which outlines plans to be carbon and waste neutral by 2030, replenish more water than it uses by 2030, as well as a handful of other environmental actions. Microsoft’s CSR strategy also highlights a handful of social policies, including commitments inclusive to economic growth, protecting fundamental human rights, and earning trust from Microsoft’s customers, employees, and communities. And lastly, Microsoft’s governance policy establishes a framework for the company’s board of directors to operate under.
When all of these commitments are looked at in tandem, they represent a pretty comprehensive ESG policy.
Apple puts together an ESG report every year for its investors. Although an ESG report isn’t exactly the same as an ESG policy — ESG reports detail past progress, while ESG policies are guidelines that are future-facing — the company’s annual report includes many commitments to ESG factors. Apple calls out its specific values in the 2022 ESG report, which include accessibility, education, environment, inclusion and diversity, privacy, and supplier responsibility — stating that these values are central to its “ESG approach.” More specifically, the company has also published its policies on things like human rights and doing business with suppliers.
Alphabet, the parent company of Google and YouTube (among others), details its ESG policies on its investors relations site. Among these policies are commitments to data security, employee diversity, environmental sustainability, supply chain responsibility, as well as reports disclosing ESG data across its businesses. Alphabet also made a splash when it issued $5.75 billion in sustainability bonds, and in 2022 it outlined how this money will be spent — on things like clean energy, circular economy, affordable housing, and commitments to racial equity.
Amazon has a website dedicated to its sustainability efforts across the environment, society, and its governance. On this page, it calls out several of the commitments it has made. This includes its plans to use 100% renewable energy by 2025, its efforts to create more sustainable packaging, the benefits it offers to employees, and more.
After going through the ESG policies of a handful of companies, you may notice how some of them are similar while others are unique. ESG policies are designed based on the individual operations of a business. That’s why Amazon has a policy about making its packaging more sustainable, while Apple has a policy about how it chooses suppliers for its hardware.
These policies help businesses develop more sustainable practices and help set themselves up for success over the long term. They also tell investors and the world that these companies are being proactive about ESG.
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The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Employing ESG strategies may not result in favorable investment performance. Securities offered through Fennel Financials, LLC. Member FINRA SIPC.
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