With the world facing pressing environmental and resource challenges, asset managers must decide on what their environmental, social and governance strategies are, as this is part of a fiduciary duty, the author of this article argues.
What could happen if nothing changes?
What if financial institutions continue to neglect ESG factors? Is it just a matter of some poor publicity for asset managers? In fact, the consequences can be dire and the material risks to economic value are clear to see.
Stories of the Enron fraud scandal, the Volkswagen emission scandal, BP and the Deepwater Horizon accident; Mossack Fonseca and the Panama Papers; Toshiba’s accounting scandals; Valeant’s secret division; Martin Shkreli’s HIV drug price hikes; Exxon Mobil’s deliberate misleading of the public on the topic of climate change. The list goes on and on. Not taking the time to properly assess a company’s risk profile can lead to the names of investors and pension funds appearing on newspaper front pages, and ultimately destroy the value of the holding or damage the reputation of the asset owners. All of these are clear examples of how affiliation (even if only perceived) with ESG issues can hurt the reputation of the investor and financial performance of funds. Incorporating ESG into investment decision-making provides no iron-clad guarantee that you will be spared such ignominies, but it does logically decrease the probability of them occurring.