ESGs – the latest and ongoing buzzword around investment criteria. A recent survey of global investors identified that the majority were predicting that ‘more than 25% of their funds would be allocated towards ESG by 2021’ (BNP Paribas). This increased demand for such investment means that ESG (Environmental, Social and Governance) factors and funds are determining where our investment funds go.
So what is part of the ESG criteria?
Investment in businesses and organisations that focus on the following:
Environmental concerns will attempt to address climate change issues and a severe reduction of resources. ESG funds will typically look at businesses that look to focus on climate change, alternative & cleaner energy sources and sustainability of resources and materials.
From a social angle, areas of focus will include diversity & inclusion within organisations; the health and welfare of employees and local communities; consumer rights and protection for their clientele; and animal welfare.
For governance purposes, it’s about clarity as to the rights and responsibilities of the management of the organisation – its board, shareholders and other stakeholders. Is the management structure – controls and procedures doing what they are supposed to? Are employee relations, the culture and values of those organisations being well respected? Is executive compensation appropriate? What about the employees’ compensation?
How is this relevant to Housing Associations (HAs)?
- Increased demand for potential ESG investments and ‘impact investing’
- Greater requirement for ‘alternative asset classes’ even within ESG portfolios
- Appetite for risk profile away from typically listed and ‘safer’ investments in pension funds portfolio to include more ESG exposure
means huge potential for HAs to broaden their investor base. After all, social housing is ‘one of the few areas where it attracts large amounts of market capital doing things that are quite clearly socially beneficial.’ (Jamie Broderick, Social Housing). This is an opportunity to attract a wider and larger group of people who are interested in a social and sustainable form of investment, through various forms of investment vehicles eg social bonds or equities as well as other forms of social financing.
What is an ESG investor looking for from HAs?
Typically ESG funds use ESG ratings agencies or their own internal measuring systems to determine if an organization is ESG investment worthy. There are many things that HAs can do to attract potential funding from ESG funds. As mentioned above, basic but not necessarily easy ‘hygiene’ processes and checks can be followed, particularly in the Social and Governance categories.
What is your HA’s footprint on the environment? What are you doing to reduce/counter it? What initiatives do you have in place to support the environment?
What is your social mission? How do you address and execute your mission? How closely do you adhere to your mandate? Do you contravene any social mission standards? How do you monitor this? How do you address diversity & inclusion; human rights; consumer protection issues; and if relevant animal welfare in your mandate?
What are the roles and responsibilities of the leaders of your HA – the board, your shareholders, and stakeholders? How do you oversea and audit them and to ensure that they are doing what they are supposed to do? How can you prove it? How do you determine that the questions being asked and the strategy & decisions being made by the Board are in the best interests of your HA? Are the employees and members of the HA being treated well? What is the culture like at the HA? What about compensation for the board members and for employees?
Housing Associations as a matter of course should be self-assessing and analyzing on all the above points and more for its own due diligence and governance. However, no matter how good one’s intent, there will inevitably be blindspots and non-deliberate oversights.
Independent board evaluations can and will help with this process. It will help a board clarify and articulate its short and longer term objectives better, as well as focus them on their current performance within the prevailing conditions. In doing so, not only is the board at its best, it is also best placed to be investor ready for potential ESG funders and their stringent criteria.
Are you investor ready?