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ESG: the 3 pillars of responsible investing

Published Dec 22, 2021

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The traditional capitalist notion that profit is all a company should worry about – as advanced by US economist Milton Friedman and proponents of his unfettered-free-market approach in the 1970s and 80s – is dying. A softer, more “caring” capitalism is taking its place, which views companies in the broader context of the human society and natural environment in which they operate. The responsible investing movement, whereby investors are driving change in the companies they invest in, is based on three pillars: environment, social factors, and governance.

1. Environment

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A company must consider its impact on the environment and, if harmful, work to reduce it to within accepted parameters. The current focus, because of the urgency of climate change, is on carbon emissions, where almost all companies can make cuts. But environmental impact goes much further: chemical pollution of rivers, degradation of natural wildlife habitats, deforestation, plastic pollution in our oceans ... companies need to take responsibility and “clean up” their act.

2. Social factors

A company has responsibilities to various groups of people, not just its shareholders. There are the company’s customers, its suppliers, its employees, and the people in the community within which it operates, who may be directly or indirectly affected in some way or another by its actions. Most corporates in South Africa have social upliftment programmes in less-privileged communities, although a cynic might view these as little more than a PR exercise. More attention could be paid to how these companies treat their own employees.

3. Governance

This relates to how a company is managed and governed – by its executives and ultimately by its board. South African companies are guided by the King IV Report on Corporate Governance of 2016, which calls for, among other things, honesty and transparency in dealings with stakeholders, fair remuneration of employees, transparency of accounting, and ethical business practices. Institutional investors see governance as a critical area in which they can be influential in doing good.

This article appears in the December 2021 issue of our free IOL MONEY digital magazine, which may be accessed here.

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