Understanding the ESG/CSR Value Chain

ESG (environmental, social and governance) is a term used by asset managers and investors to evaluate corporate behaviour and to determine the future financial performance of companies. Companies and business schools spend much time developing CSR policies and it is curious to see where or if these two acronyms coalesce.

ESG performance indicators include sustainable, ethical and corporate governance issues such as managing the company’s carbon footprint and making sure there are systems in place to ensure accountability. Corporate social responsibility (CSR) is a form of self-regulation ensuring a company's actions have a positive impact on the environment, consumers, employees, communities, and the public sphere. Spot the difference?

Where ESG meets CSR is in the need to think long-term. But at a time when the typical US CEO is in post for no more than 4 years and asset managers are mostly rewarded for fast returns long-term thinking can be seen as a luxury. Participants at the First State Responsible Investment Forum in London this week did not seem to think so.

The Forum, which also served to launch First State’s 6^th Annual Responsible Asset Management Report, looked at the long-term from an asset management perspective citing the balance between patient and impatient investors, and presenting a vision of the value chain from asset owner (investor), asset manager, to asset (company) as being central to any capital market/corporate endeavour.

Assembled at the City of London’s Glazier Hall this audience was very much on the same page as the corporate leaders and business thought-leaders who increasingly see CSR as a key driver of progressive organizations. This was evidenced by the subject titles of the event, the key note address and the panel debate.

Forum title: ‘Responsible asset management in the 21st century’ introduced by Will Oulton, Head of Responsible Investment, First State Investments;

Keynote address: ‘How can asset owners effectively signal a long term investment agenda?’ delivered by Divyesh Hindocha, Global Head of Research, Mercer;

Panel session: ‘Delivering long term, sustainable, asset performance’ facilitated by Mike Tyrell, SRI Connect.

The timeline issue, that in order to make a difference investor patience is essential, is equally critical for corporate leaders and is something that has been emphasised by numerous business thinkers. In his address Divyesh Hindocha quoted a Chinese proverb which seemed to sum up the approach needed all along the value chain:

‘One moment of patience may ward off great disaster. One moment of impatience may ruin a whole life.’

Essentially there seems little difference between ESG and CSR other than they are conducted/assessed by different groups of people. Companies have CSR policies and even departments dedicated to CSR, employees and investors are increasingly concerned to do good by the environment and society, and a new breed of asset managers are also actively steering investors towards engagement with socially responsible companies.

Is there now the opportunity for greater impact if these groups came together?

Understanding the value chain and the attitudes and objectives of the players involved is an important starting point. Perhaps missing in this dynamic is the easily accessible information, research data, and strategic thinking that can support companies and their investors in following long-term sustainable strategies.