Financial Management 244
Responsible Investment (RI), Environmental, Social and
Corporate Governance (ESG) Considerations and
Integrated Reporting
Introduction
Companies cannot function without the capital supplied by shareholders, bondholders and banks. In
addition to using conventional financial criteria, investors are now also considering if ethical and ESG
risks are being managed. Investors are increasing criticizing and voiding companies that do not have
sound EGS risk management policies and practices, and those whose reporting in this regard lacks
depth and transparency. There are many consequences of weak ESG management, but the main and
most prominent is the adverse impact it has on the share price of a company. As weak ESG
management can have such major impacts on the share price, it is important that managers lead the
cause by environmentally and socially minded investors.
We saw an example of a fall in the share price due to not following ESP principles at Volkswagen.
The company sold sophisticated software in their vehicles that would detect when it was being
tested, and subsequently change its performance to reduce carbon emissions. There was an outcry
of discontent by shareholders and customers when this was discovered. The consequences of this
scandal will be felt for years to come by the company in terms of their financial performance.
We have also seen a rise in South African firms in the spotlight for dubious activities. An example
was the Steinhoff accounting scandal, where the financial reports were manipulated. The Tiger
brands Listeriosis outbreaks was another example. Both of these companies saw their share prices
plummet in a short period of time as a result of these scandals. If companies wish to avoid negative
publicity and adverse movements in their share prices, they should lead the cause by investors to
improve their ESG policies, management and practices.
Responsible Investing Defined
Responsible investing is an investment approach which refers to the integration of ESG consideration
into investment analyses and ownership practices. Environmentally conscious investors often
scrutinize company’s in devours to reduce the adverse impact of climate change, reduce waste,
reduce water consumption, minimize pollution, use clean technologies, find alternative energy
sources and green buildings. Social criteria normally focus on what companies are doing to promote
broad-based black economic empowerment (B-BBEE), uphold human rights, develop employees,
improve health and safety, reduce HIV/AIDS and create new jobs, amongst others. Corporate
governance refers to the system in which firms are directed and controlled. Pertinent attention
should be given to the composition of a company’s board of directors, specifically in terms of
director independence. There should also be a variety in race, gender, age and experience at board
level, executive remuneration policies should be fair, and the board should ensure accurate
reporting.
Oceana
Let’s consider how we would investigate a company’s environmental aspects. We will use the
example of Oceana, the largest fishing company in Africa. We will discuss some of the environmental
factors that were highlighted by the company. By volume, majority of harvested commercial fishing
rights were on the green list of the South African Sustainable Seafood Initiative (SASSI). Seabirds and
non-target fish species are caught alongside hake in the deep-sea trawl fishery. Greenhouse gas
, emissions intensity at land-based facilities in 2018 were reduced by 2.2% compared to that of 2016.
They have plans in place to ensure that food that is not fit for humans or animal consumption (i.e.
waste) is sent to landfills but is directed to fishmeal processing facilities. There are also plans to
reduce the use of potable water by 40% in the future.
Oceana also have a number of social aspects highlighted in their 2018 integrated report. There were
no occupational facilities in 2018 and there was a decrease in the number and severity of safety
incidents. The company had independently accredited B-BBEE level 1 rating. They invested R21.9
million into employee skill development in areas such as marine science, vessel crewing, artisans,
supply chain management, IT, finance and food safety, quality and processing. Oceana is one of very
few employers that guarantees minimum hors to seasonal employees. Their corporate social
investment spent in 2018 amounted to R4.6 million in South Africa.
In terms of corporate governance at Oceana, they highlighted that they have diversity is age and
race, with a majority of their directors being independent, with a long tenner (more experience in
the field). Furthermore, the remuneration committee is satisfied that executive compensation is
linked to long-term performance and value creation. In 2018, the average executive increases were
once again lower than that of other employees.
The above mentioned are all aspects that an investor needs to take into consideration when
deciding whether or not to invest into a company. Investors can no longer just look at financial
performance of a firm – they need to start considering ESG aspects too.
Responsible Investing Strategies
There are a number of strategies that responsible investors can use to integrate ESG considerations
into their investment practices. These strategies can be separated into three broad strategies:
Screening
o Negative or Exclusionary: Here, investors avoid/exclude investments I so-called
‘undesirable” countries, industries and companies. Exclusionary screens use
internationally exclusionary include anti-tobacco, anti-nuclear, anti-uranium and
anti-animal cruelty amongst other. A growing number of Muslim investors around
the world are shunning investments based on Shari’ah law (the bulk of exclusionary
screening used by South Africa investors). According to this law, no investment
should be made in alcohol, adult entertainment, gambling, banking and insurance,
non-halal food, or companies with too much leverage. Another example of
exclusionary screening would be to avoid companies that part take in child labor.
Individual investors that apply negative screens are aware that they may not be able
to change the world with their values but gives them moral piece of mind. They
invest in line with their own moral and religious convictions, with the aim of doing
no harm. This is very subjective. The main issue with exclusionary screening is that it
is very difficult to determine the rules of exclusion. The returns of
negative/exclusionary screened investments tend to be on par with unscreened
investments. It has been found that despite the popularity of exclusionary filters,
there is limited impact of corporate policies and practices.
o Norms-based or Positive: This is in contrast with negative screening. Norms-based
investors reward good corporate citizens by providing capital at lower costs. These
good corporate citizens refer to companies that try to limit their impact on the
environment, uplift communities, develop employees and treat customers fairly. In
other words, they take ESG considerations into account. This evaluates companies
based off of their compliance with international standards and norms. Investors
often refer to the United Nations Global Compact (UNGC) and the Organization for
