Is ESG just the latest buzzword?

Environmental, Social and Governance (ESG) is a framework that has become increasingly popular in the business world. While for decades we had Profit as the only indicator for the success of a venture, in the recent years the voice of those demanding for more accountability on other fields became louder.

Some pushed for more corporate accountability with regards to the impact on the environment. Others demanded fair treatment of the employees and other stake holders. Lastly, more and more analysts requested higher scrutiny of the organisational practices. The result is the ESG framework, a methodology applied to business valuation that — in some cases —can predict sudden drop in share price of a listed company.

The field is relatively new, so the predictability has been mostly proven by reverse engineering. First, a case of sudden drop was taken under analysis. Then, backtracking a few years, ESG score was applied to the company. The conclusion was that in some cases ESG was a good predictor of sudden drop in share price.

The reason why I keep repeating the word sudden, is because ESG does not predict the performance of a business from a Profit standpoint. Or at least there is no evidence of such predictability. What ESG can help to spot are malpractices that manifest in scandals or crisis, and in turn to an overnight massive drop in share price.

An example is the social media Facebook (which the holding company is now called Meta). When in December 2015, The Guardian released the highly publicised article about the Cambridge Analytica scandal, Facebook share price plummeted by 9.5 per cent over a month.

Had the ESG — and especially the G part of the equation — been kept in account and utilised as a predictability factor, perhaps the leak of data could have been prevented, so could the share price drop.

In terms of investment, portfolio managers offer products designed around ESG metrics, offering investors the opportunity of putting their money where their heart is. Generally, are investors with strong feelings about social and environmental issues that are keen to invest in such a type of portfolio. Often sacrificing on short terms gains but seeing the ESG framework as a sort of insurance against sudden drops due to scandals or media crisis. In the media, ESG has become a hot buzzword. According to PR newswire, there were 284 press releases about ESG in June 2021 in Asia-Pacific. A drastic soar from the mere 11 in February. Of all the ESG related press releases issued in 2021, 1 in 4 was in the Energy Industry. Business Technology came in second with 12.9 per cent and Industrial Automation 3rd, with 9.4 per cent. Interestingly, the 4th place was taken by Health, Medical and Biotech at 8.2 per cent. Overall, across all industries there has been a shift to the type of media communication that corporations are portraying about their operations.

In terms of topics, Climate Change took the spotlight, with 57 per cent of all ESG related press releases. Runner up was Renewable Energy, with 22 per cent of all mentions. This shows that the trending topic is the E in ESG: Environmental. In fact, G — Governance — is a topic that has been discussed for decades, and perhaps more mature than E and S. In the next column we will discuss more about ESG implementation. (To be continued)

(The writer is a member of the International Press Association)