Investors need to consider the sustainability of the companies they invest in to ensure they are not exposed to future risks that could negatively affect financial performance, Standard Life Investments has warned.
The firm’s Global Outlook Q1 2014 report argues that companies need to take environmental, social and governance (ESG) issues into consideration in order to secure sustainable growth. Investors also need to investigate where their money is going to protect themselves from risks in the future.
Integrating ESG matters into investment strategies is increasingly popular and productive, for both businesses and investors, the report found. A particular focus has been placed on providing a deeper understanding of a company, its risks and opportunities.
Since 2006, when the United Nations launched the Principles for Responsible Investment (PRI) to help institutional investors incorporate ESG matters into their policies, the number of signatories has grown each year. In 2013, around 1,100 investors, with combined assets of around $32 trillion (£19 trillion) had signed up to the principles.
The growing trend of taking non-financial issues into consideration is also reflected in sustainability reports. In 2005, 64% of the world’s 250 largest companies reported their sustainability activities by 2011 this figure had reached 94%.
Amanda Young, head of responsible investing at Standard Life, wrote, “Clearly, companies can no longer operate in isolation. The way firms conduct their business affects both the environment and society.
“The environmental and social externalities that companies need to consider as part of their business strategies evolve and change constantly and can pose significant financial risks for organisations.”
She added that the current issues include the risk of stranded assets for extractive industries, which will particularly affect big coal miners; the implications on productivity of poor human capital management, which may affect large employers; and the working conditions in countries like Bangladesh.
The issue of working conditions aboard will impact on businesses that have international supply chains. Poor working conditions were bought to the public’s attention in April last year, when a factory collapsed in Bangladesh. The avoidable disaster raised questions about safety and working conditions and the role consumers and investors in western societies play.
These are issues that investors need to consider as they can impact on returns, particularly as government regulation around sustainability and ethics increases. Young uses that example of the US Foreign Corrupt Practices Act, which prohibits companies from bribing foreign officials in any part of global business operations, to demonstrate this.
The Act applies to any company that files under the US Securities and Exchange Commission. This means it can affect non-US companies and French oil firm Total paid $398m (£241m) to resolve allegations impacting on its shareholders.