Traditionally, the primary concern of investors has been the level of returns provided by an investment, with general ambivalence towards how those returns have been generated. Now, the industry is seeing a drive towards responsibility in its stewardship of investor money, with investors seeking to understand how their savings are being invested.
Ethical or responsible investing is not a new development, with many asset managers offering funds or investments under various guises; responsible, ethical, sustainable, socially conscious or impact investing are terms that you may have seen, almost interchangeably in many cases. A set of standards have developed in the industry to evaluate how companies operate in respect of the world around them, the people they deal with and whether they govern themselves in a responsible manner; these are termed ESG, for environmental, social and governance.
What does this mean?
ESG -
How a company interacts with its environment, so disposal of waste, use of energy, sustainability of resources, carbon footprint or compliance with environmental regulations.
SOCIAL
GOVERNANCE
How a company is governed. This can mean rights of shareholders, avoiding conflicts of interest and making sure that the remuneration of directors is transparent.
ESG investing seeks to quantify and evaluate companies in these three categories, guiding investment into companies that are well governed and treat the world, their communities and staff in a responsible manner.
Fund managers are integrating these ESG criteria into their asset selection in varying degrees, with many managers building their entire research and selection process from the bottom-up to ensure that the companies in which they invest operate to these standards.
Further to the ESG criteria, there are a number of more targeted approaches that investment managers use as part of specific sustainable or responsible strategies. Here are some examples:
Thematic investing
Directed investment into specific themes, such as tackling climate change, transition of energy usage to sustainable sources or future water and food shortages.
Positive and negative screening
Positive screening is simply adding companies that exhibit responsible behaviour to a whitelisted universe in which to invest. Negative screening is the opposite, screening out companies that invest in unsustainable, controversial or unethical industries or exhibit poor ESG behaviour.
Impact investing
A strategy whereby investment is focused into responding to social or environmental needs and making a positive impact.
Active Ownership
An investment manager with a strategy of activism will not necessarily stop investing in companies which do not fulfil ESG criteria, but will engage the board of directors to encourage change.
Investment managers may use some, or all, of the above as part of their ESG strategy.
There appears to be a growing opinion in the investment industry that companies that fit ESG criteria are well equipped to manage risk and operate in a sustainable manner in the future, so therefore are attractive investments in their own right. To this end, many investment managers are integrating ESG methodology into their investment processes from the ground up, rather than incorporating them into specific ethical or socially conscious strategies alone.
Traditional thinking on the necessity of giving up growth for ethical or responsible investing is also being reconsidered.
Many studies have highlighted that the investors of tomorrow will insist on positive impact as well as positive returns, so ESG methodology is now part of the mainstream and is here to stay.
The assessment of how a company interacts with its environment is one of the three key factors in understanding ESG risks and opportunities. This is the ‘E’ in ESG.
Fundamentally a measure of a company’s impact on the natural or physical environment, this could be related to use of natural resources, policies on business travel or how it reduces waste in its operations, for example.
Climate change is perhaps the most significant of challenges facing humanity, and therefore one of the most important elements in assessing ESG factors; this is because of the likely impact that climate change will have on every aspect of our lives but also because of the regulatory and societal changes that will be required to combat it. Planning for and reacting to these changes will mean that companies will either be able to thrive or will struggle as world governments make the necessary policy changes.
Therefore how a company contributes to greenhouse gas emissions, its carbon footprint, its use of resources, its waste policies and its energy needs are all important to understand. Companies that do not consider the impact of their businesses on the environment are also leaving themselves open to regulatory sanctions, criminal prosecution and reputational damage, which will all have an effect on the balance sheet and therefore shareholder value of the company.
It is also believed that the current markets have not priced in the inevitable changes to governmental policies that will take place as the realities of climate change become apparent. This will mean that we will see tangible financial impacts to companies that are not prepared to move with the decisive changes likely to take place.
Climate change is also likely to result in more frequent and more damaging meteorological events, resulting in the risk of significant financial losses which will need to be factored in to any assessment of a company.
Aside from the various impacts of climate change, there are a number of other factors that are important to understand. The transition to a circular economy, eliminating waste and making continual use of resources, is likely to be painful and necessary. Therefore how a company makes use of resources and how they deal with waste is a key factor.
Finally, energy considerations are far reaching and impactful; use of sustainable energy, reduction of fossil fuel usage and reduction of carbon footprint are also part of the assessment of ESG factors.
A company that is placed to make efficient use of resources, cope with regulatory change and take advantage of opportunities as society inevitably reacts to changes in the natural world will be at less risk to shareholder value than companies who risk sanctions, reputational damage and loss of earnings as a result of short-sightedness of environmental impacts or interact with their environment recklessly or in a damaging manner.
The assessment of how a company interacts with the people around it is one of the three key factors in understanding ESG risks and opportunities. This is the ‘S’ in ESG.
A company has many social interactions, whether staff, suppliers or customers, and each operates within the dynamics of society and within the bounds of its reputation and demographic. Understanding how this web of social interactions is managed is key to assessing its risks.
Treatment of a company’s workforce is an important part of its ESG assessment. Equal and fair working conditions, remuneration and rights are all expectations of a company that treats its employees well and with respect. An employee should not be treated differently because of gender, race or beliefs.
There are a number of potential consequences for mistreatment of the workforce, from difficulties in retaining skilled staff to strike actions. Likewise, ensuring the safety of staff is an important consideration. Poor health and safety could lead to criminal prosecution, fines or regulatory sanctions.
The same principles of fairness, equality and safety extend outside of the workforce to other groups of people, for example suppliers. This can be especially key when suppliers are based in countries dealing with poverty or poor working conditions.
There are strong values attached to many of these social interactions, with equality and fairness issues, for example, rapidly creating difficult situations for companies that are seen to exhibit poor behaviours or attitudes. This can quickly lead to consumer action or boycotting, and therefore have a material commercial impact.
The goods and services that a company sells can also be a source of controversy and therefore interact poorly with social values; an arms or tobacco company carries implicit ESG risks from the business that it undertakes.
Understanding the social interactions of a company is therefore very important to understanding its ESG risks. A company that treats the people with whom it interacts in a fair and sustainable manner will minimise their exposure to these social risks.
EAICE gives you the control to build designed reports from highly designed customized components and templates in-house.
When you first get started with EAICE, you’ll work closely with a dedicated consultant. You can do it yourself, but you’re not alone—we also offer 24/7 support and can create a 'draft zero' of your report (with last year's content) as a starting point.
Your consultant will help set things up and walk you through everything—from discussing your business needs, to overseeing implementation, to providing ongoing support and insight.
Log in securely. Sign in to your private cloud environment using your credentials and secure two-factor authentication (2FA).
Your private cloud environment will be set up for you. Access can be restricted to your network and/or specific IP addresses—but most clients prefer to allow secure access from anywhere, anytime.
On-premise environments are also an option—your EAICE consultant can help you determine the best solution for your needs.
Create a new report from custom templates. Choose the type of document you’re creating from a list of custom templates (e.g., Annual Report, Proxy Statement, Sustainability Report, etc.).
EAICE will be created and customized for your business based on your specific use cases.
Build your table of contents. Create the initial structure of your report—adding sections and sub-sections—using our intuitive interface. You can continue to edit this structure as you go.
Assign privileges. Grant role-based privileges to the people you’ll be collaborating with, like content writers, editors, and reviewers. You can also create tasks and assign them to specific users.
Create and edit content elements with the built-in visual editor. Place content elements (e.g., paragraphs, tables, images, highlight boxes, quotes, etc.) in your sections using the intuitive, easy-to-use editor. Tangelo will automatically lay out the pages, intelligently applying your custom graphic design—so you can focus on the content itself.
The type of report you’re creating (and your unique design) will determine what kind of sections you can create. In turn, the types of sections you create will determine what kind of content elements you can add.
Your custom templates will be set up ahead of time, before you start creating the report.
Create preview PDFs and websites. Create PDFs at any time as you edit to see your report with all the styles from your design template applied. You can also preview the website version of the report created from the same source, applied with the styles from your custom web design.
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Your dedicated Tangelo consultant can work with your finance team, HR department, or any other collaborators to help them optimize existing spreadsheets for synchronization.
Add ESEF information, if applicable. Set properties to guide the auto-tagging for ESEF, identifying current and previous reporting period columns, 'containers,' currencies, units, etc. in the financial statements.
Your consultant will work with you to map the 'labels' used in the financial statements to concepts in the ESMA IFRS taxonomy and define any custom labels or preparer extensions. Based on this mapping and the added ESEF information in the report, the actual tagging process is automated.
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Track your progress. As you’re creating your report, you will track your progress by giving each section a status (i.e., ‘In progress,’ ‘Ready,’ ‘Reviewed,’ or ‘Approved’).
Keep things orderly with version control and more. You can freeze drafts, track changes, and even create internal PDFs that visually display tracked changes, tasks, data sources, and more.
Multi-channel, publish across formats
Modern shareholders demand modern communications. So do stakeholders—from employees to customers to communities at large. To reach a new generation of people, companies must adopt a singlesource, multi-channel approach to corporate reporting: one that allows them to build visually appealing, user-friendly corporate reports that integrate seamlessly into a digital world.
Publish print-ready and downloadable PDFs. Create multiple types of PDFs once the final draft is approved. From high-resolution print-ready PDFs, to lightweight PDF files for your website, to eco-friendly PDFs with less colors and images, you can produce all with a few clicks.
Launch the website version of your report. Publish the website version of your report. A finalized copy of the document will be copied from your secure private environment to a public server, where it’s made available under the required URL on your domain.
Generate the ESEF filing. Entities reporting under European Securities and Markets Authority (ESMA) regulations can generate the report in the European Single Electronic Format (ESEF) from the same source as the PDF and website versions. 100% accurate and fully leveraging this new channel in investor communications.
Roll your report forward over the years.Producing your second report in Tangelo is even easier. You can simply duplicate your previous report and synchronize your new data sources to update all the linked figures.