More than just another corporate world acronym, ESG (which stands for Environmental, Social, and Governance) is increasingly part of the arsenal of information that investors and companies are paying serious attention to.
Those of us with long memories will no doubt remember when Corporate Social Responsibility became all the rage in boardrooms around the world, as companies embarked on their own individual versions of an ethical spirit quest.
That developed over the years into some fairly solid attempts to out-Good-Guy competitors, as companies realised that the old days – when consumers, and by extension investors, could be relied upon to offer undying brand loyalty despite whatever horrors were happening behind the scenes – were coming to an end.
There’s a key difference between CSR and ESG, however. Where CSR was born from attempts by companies to effectively self-regulate often largely for appearances’ sake, ESG is a far more rigid framework, with identifiable and measurable metrics.
And that means that the Bad Old Days of Joe Public trying to choose who to invest in by comparing Company A’s forest of newly-planted trees to Company B’s aggressively charitable sponsorship of every local Z-Grade netball team it can find are, by and large, behind us.
Instead, it is possible to generate something approaching a side-by-side comparison of companies when making a decision about which one you’d like to sink your hard-earned into in the hope of making a decent return, while at the same time hanging on to your soul.
It goes far beyond photos of clean rivers and healthy koalas wedged in between the pie charts and P&L statements in a company’s annual reports – and that’s because (shock, horror) investors are really starting to pay attention to it as well.
Where ESG investing is headed
At the recent RIU Sydney Resources Roundup – a conference event that attracted some 70 mining companies from around the country to come and pitch woo at potential investors (and stickybeak at what their competitors are up to) – I had the opportunity to listen to an explanation of ESG, and its place in modern investing, at a seminar organised by Socialsuite.
For background, Socialsuite is a company that has taken a lot of the sting out the organisational end of measuring and meeting ESG targets for companies that simply don’t have the time or warm bodies required to try to blunder their way through the process of compiling information that investors are increasingly wanting to know up-front.
The company, Socialsuite CEO Brad Gurrie said, focuses on the Small Cap/Micro Cap end of the ASX, with a current client list numbering around 95.
55 of those clients are in the mining and resources sector, where competition for investor dollars is as fierce as the fight for the final decent scone at a meeting of the Mudgee CWA.
It was an opportunity for Gurrie to showcase what his company does, by getting clients and end-consumers of the data together to talk about the way managing ESG has changed, and the strength of getting it right in what’s currently a difficult market for attracting new money, especially for the smaller players.
Is ESG really that crucial, though?
Importantly for Socialsuite and its clients, the role ESG is playing in investor decision-making is for everyone from institutional investors through to small time market dabblers.
Damian Hadja, co-founder and director of Socialsuite, spends most of his time working on his role at the helm of Melbourne-based Next Investors, and says that there’s a demonstrable cost to a listed company not reporting – accurately or otherwise – where it sits with ESG.
Hajda says that when it comes to getting the undivided attention of potential investors – big institutional players or otherwise – without a clear ESG reporting strategy, fully 50% of any potential money evaporates before talks have even begun.
And that is potentially a massive chunk of change, even for Small Cap companies.
Latin Resources (ASX:LRS) CFO Mitch Thomas said that one of the first things major potential investors looked for in his company was a positive ESG report when the company undertook its most recent capital raise.
The company reported in late April that it had firm commitments to add more than $37 million to help fund its hunt for lithium-bearing spodumene in South America – and fully $15 million of that came from a single Canadian institutional investor which had ESG principles front of mind when making the call to buy in.
The difference in the boardroom
Chris Stephens is CEO of Coda Minerals (ASX:COD), a Socialsuite client who was on hand to unequivocally sing the praises of how the company has been a massively important source of assistance for his $42.5 million market cap copper exploration play.
Stephens says that like a lot of things in business, everyone has an opinion on how ESG should be run – and for board members on small companies, that means that there’s a lot of people shooting from the hip when discussions about ESG get underway.
That ends up with non-executive board members, to whom a lot of the finer detail is an impenetrable pile of gibberish peppered with numbers that don’t immediately make sense, having to wade through opinions rather than facts during crucial decision-making.
By his own admission, Stephens says the size of his company meant that getting their ESG data into digestible shape was an almost Sisyphean task – Coda’s got about five full-time front office staff, and would obviously rather be spending its cash on looking for copper than on someone to help turn the company’s ESG data into meaningful information for potential investors.
A fundamental shift in generational wealth
Perhaps the most telling point about how important ESG has become came from Next Investors’ Damian Hajda, who used a brief history lesson to illustrate a hugely important point.
Way back in the late 19th Century, King Leopold II of Belgium perpetrated an eye-watering catalogue of atrocities in what was then called the Congo Free State, in his quest to corner the booming rubber market.
It took decades for the stories of just how utterly foul his treatment of the enslaved people of that area were, but when word finally spread, there was enough political pressure brought to bear that Leopold had no choice but to turn things around. (Well, to a very large extent. Looking at you, cobalt.)
These days, information obviously spreads a lot faster, thanks to social media and the internet, and an entire generation of young adults have grown up with the world – the good, the bad and the often very, very ugly – at their informational fingertips.
Something which is clearly obvious is that access to information has given rise to a generation that is uniquely placed in its understanding of the importance of personal ethics when it comes to satiating their consumer-level needs.
What has escaped the attention of many, though, is the fact that the next couple of decades are going to see a huge shift in ownership of generational wealth, from an older generation to whom ethics are often a secondary consideration to the younger generation.
That’s a generation driven far more primarily by their need to be comfortable with where their inherited, investable wealth is going to be parked.
Which in turn means that the number of investors willing to walk unless there’s digestible, positive ESG data on the table – as mentioned, that’s currently around 50% – is only likely to rise.
At Stockhead, we tell it like it is. While Latin Resources is a Stockhead advertiser, it did not sponsor this article.