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Where Are You on Socially Responsible Investing?

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Tuesday, 26 March 2019 01:31 PM Current | Bio | Archive

Corporate America is on the clock and under scrutiny.

Auto manufacturers have paid the price for cooking emissions data. Social media companies have come under fire for their abuse of user data.

Multiple banks have found themselves in hot water for taking improper deposits and even opening unauthorized accounts. Blame continues to be placed on energy production and transportation companies for just about every environmental ill—real or perceived—under the sun.

When taken at face value, consumers and investors could reasonably assume that corporate America is filled with bad actors. However, the reality is that most companies follow the letter and spirit of the law.

Nonetheless, many organizations have been deemed guilty by association and have taken hits to both their reputation and their stock price based on public perception—through divestment.

While hits in stock prices can often be attributed to the latest corporate scandal dominating the news, there are other factors to consider — in particular, rating systems that encourage investment in “socially responsible” companies.

At the end of 2017, one in four dollars under professional management in the U.S., or $12 trillion, was invested using socially responsible investment (SRI) strategies.

How do companies get beyond the court of public opinion and outside of the news cycle? How can organizations protect themselves from the fallout of a scandal? How can businesses showcase their exemplary commitments to the environment, social well-being and corporate governance?

One increasingly popular way for companies to be recognized as socially responsible is to implement an Environmental and Social Governance (ESG) program. But what is ESG?

ESG is a generic term for a framework by which a company, its shareholders and its stakeholders quantitatively measure their successes and shortcomings in meeting Environmental, Social and Governance metrics.

ESG metrics often address public concerns about an industry. For a technology company, a key parameter may focus on protection of user data. For an auto manufacturer, it may be maximizing the energy efficiency of their vehicles. For an energy producer, it may be a reduction of methane emissions.

For example, consider an energy company in a highly scrutinized industry that produces commodities essential to our economy and national security. They’re a perfect candidate for an ESG program.

Let’s assume that this company produces oil and gas in the Permian Basin, which spans Texas and New Mexico, using hydraulic fracturing techniques. Through these techniques, this area has produced unprecedented volumes of energy, reducing the need for the import of overseas oil and gas.

Due to the Permian Basin’s arid climate, production in this region has increased the demand for water. Considering the importance of this area, and its unique environmental concerns, any energy company producing in this area would be wise to consider a water management plan as part of its broader operational program.

From an ESG perspective, such a plan is significant from an environmental perspective and a community relations perspective. By merely publishing aspects of its water management plan, the company can use existing information to assure the local community that a plan is in place to source water that will not negatively impact the community’s needs.

Sharing this information with investors could help them understand that the company has a risk management plan in place to maintain operational margins and their social license to operate.

In other words, a practical ESG program can mitigate operational, reputational and investor risk. Done thoughtfully, ESG is a win-win.

After designing an ESG program, companies must contemplate taking the critical next step of publishing their ESG program performance in a way that the market will understand and is actionable. This step is perhaps the most controversial since the most effective way to publish results would be through forms such as the 10-K or 10-Q SEC filings.

To be clear, ESG is not a substitute for sound operations, a strong balance sheet and robust cash flows. Just look at Facebook and PG&E, who rated high in the ESG rankings. That’s because, when done correctly, a planned and well-executed ESG program can optimize operational metrics and lead to improved financials. A thoughtful program will also inform and quantify the best measures on where a company needs to focus.

Socially responsible investing is here to stay. It is up to companies to decide whether to get ahead of it or to wait and see what comes around.

Ryan Scott is Vice President at HBW Resources. He previously worked at Deloitte & Touche’s Strategy & Operations Consulting practice. 

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Socially responsible investing is here to stay. It is up to companies to decide whether to get ahead of it or to wait and see what comes around.
responsible, investing, socially, companies
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2019-31-26
Tuesday, 26 March 2019 01:31 PM
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