REPORT
Social and Governance Elements under ESG
By Lim Tau Wee
The importance of ESG is being increasing felt and practised by firms around the world especially the trading nations . But out of all three letters in the acronym of ESG , the “ G ” is often overlooked , because it is viewed as not “ directly ” linked to sustainability or often not associated with environmental and social “ good deeds .” The “ G ” component was necessary in order to support the “ E ” and “ S .” Plus , it ’ s practically mandatory for building up long-term , sustainable value , or even for general business compliance .
Similarly , “ S ” pertains to a company ’ s societal influence and risks , encompassing employee welfare , human rights , and community engagement . Prioritising social responsibility in business builds positive relationships and societal contributions .
BACKGROUND OF ESG
The early days of ESG can be traced back to the 1960s and 1970s , when socially responsible investing ( SRI ) began to gain popularity . SRI involves selecting investments based on a company ' s social or environmental impact , as well as its financial performance .
A 2004 report from the United Nations — titled Who Cares Wins — carried what is widely considered the first mainstream mention of ESG in the modern context . This report leaned in heavily , encouraging all business stakeholders to embrace ESG long-term . The rapid growth of ESG investing can be attributed to various factors , including increased awareness of global sustainability challenges , heightened regulatory scrutiny , and the recognition that ESG factors can materially impact financial performance .
' Socially conscious ' investors around this time were largely focused on topics such as human rights and pollution ; the idea that there could be a link between ESG and financial performance was just emerging . However , the term ESG did not come into use until 2005 . Yet , ESG has always included business objectives while striving to make the world a better place . Since that time , the terms ESG , CSR , and sustainability have been used interchangeably by companies .
ESG issues were first mentioned in the 2006 United Nation ’ s Principles for Responsible Investment ( PRI ) report consisting of the Freshfield Report and Who Cares Wins . ESG criteria was , for the first time , required to be incorporated in the financial evaluations of companies . This effort was focused on further developing sustainable investments . At the time , 63 investment companies composed of asset owners , asset managers and service providers signed with USD6.5 trillion in assets under management ( AUM ) incorporating ESG issues . As of June 2019 , there are 2,450 signatories representing over USD80 trillion in AUM .
The objective of the report was on the integration of environmental , social and governance issues into investment policy ( including asset allocation , portfolio construction and stock-picking or bond-picking ) voluntarily permitted , legally required or hampered by law and regulation ; primarily as regards public and private pension funds , secondarily as regards insurance company reserves and mutual funds .
Like many professional activities , investment decision-making is an art rather than a science : there is no formula that guarantees a particular outcome . It is important to distinguish therefore between optimal decision-making and optimal decisions . The law is concerned with the former , as the latter can be arrived at only with hindsight . The oft-repeated caveat that ‘ past returns are no indication of future performance ’ is reflected in
REPORT
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