ESG

Soon Australians will be voting in a referendum, the purpose of which is to recognise Aboriginal and Torres Strait Island people in the constitution and to create a permanent body that would give advice to the government and executive on matters relating to them.

During the campaign leading to the referendum I couldn't but help notice the number of commercial organisations who were publicly and financially supporting the 'Yes' side. Why would these companies involve themselves in the issue?

Then I discovered ESG (Environment - Social - Governance). ESG is a set of criteria investors and banks can use to rate a business's risk. It's something that started in the early 1980's and gained particular prominence with banks after the 2008 global financial crisis (2008 GFC). Why has it assumed importance for companies? Imagine you are a large vehicle manufacturer. Every month you produce tens of thousands of vehicles. Obviously they don't all get sold in the same month. But you still have bills to pay (eg, wages, suppliers, utilities, etc). Your bank provides you with a line of credit (i.e., an over draught) because they know you will eventually get the money for the vehicles.

After the 2008 GFC banking and finance institutions became even more focused on risk management and placed more emphasis on ESG as a way to measure potential risk. Organisations responded by improving their environmental actions and corporate governance processes. They could also improve their ESG rating by supporting social issues. One might argue that the 'social' aspect was a relatively cheap or 'soft' way to improve their overall risk mitigation ranking. However sometimes this backfires. The Dylan Mulvaney and Bud Light fiasco looks to be an example where an organisation attempted to improve its social rating only for it to have major adverse financial and brand implications. Closer to home, recently Qantas had its brand reputation trashed and shortly thereafter actively supported the YES campaign. A cynic might suggest Qantas is actually concerned about its ESG rating rather than the referendum.

Now when I see a corporation taking a position on social issues I wonder whether this is genuine or an attempt to improve their financial risk rating.