Investors Perspective and Investment Value Drivers Including Environment, Social and Governance Issues - Assignment Example

Investors’ Perspective and Investment Value Drivers Including Environment, social and governance Issues Name Professor Institution Course Date Introduction A crucial aspect within the investments performance is the capability of the investors to identify the drivers of anticipated return and risks of the investments (Hayat and Orsagh 2015, p.1). Portfolio managers and financial analysts are anticipated to have the knowledge of financial factors which often drive up the investment value. However, factors which are complex to determine in the monetary basis and which do compose part of usual financial factors also impacts return and risk of the investments also affect the risk and return of investment. These factors which affect investments are known as environmental, social, and governance issues. Psaros (2009, p.45) contended that the ESG factor has normally been of major focus by the media in the recent years particularly in the case where investors suffer significant losses on company’s listed equities. In the process, investors have been fast attributing such losses to poor management of ESG issues and forgetting they also have a duty to encourage higher standards of ESG performance. Hayat and Orsagh (2015, p.1) posited that some of the companies which have collapsed duty poor of management of ESG factors and proved to be costly to the investors include Enron, One.Tel, HIH Insurance, Parmalat and WorldCom. Therefore, this essay will analyze why the integrated issues of environmental, social and governance should be added value to investor’s decision-making process. In addition, this essay will discuss why investors should encourage higher standards of ESG performance in the companies in which they are invested, and why the investors have a responsibility to support the integrity and stability of the financial system. Why the integrated issues of environmental, social and governance should be added value to investor’s decision-making process According to Hayat and Orsagh (2015, p.3) Environmental, social and governance are described as the three key factors used in gauging ethical and sustainability effect of the investment within the business or a company. When these factors are practiced positively the process is referred to as responsible investing. Brian, Singhal and Subramanian (2010, p.433) stated that over the years, research has focused majorly on the how managers should increase shareholders’ return and forgetting the role of investors in responsible investing. Therefore, in the recent past, studies have been done of role of investors and why the integrated issues of environmental, social and governance should be added value to investor’s decision-making process. Sullivan et al. (2015, p.9) claimed that in spite of considerable steps being made, numerous investors are yet to completely incorporate environmental, social and governance factors within their decision-making processes on investment. However, several nations have since introduced various codes and regulations prompting firm investors to consider ESG metrics into their decision-making on investments (Sullivan et al. 2015, p.9). In fact, Australia is one of the countries which now regards failing to take in value drivers consisting of environmental, social and governance factors into their investment practice as a violation of the fiduciary duty. Sullivan et al. (2015, p.3) argued that the code and the regulation have bestowed investors the active ownership which prompts them to use their right such as shareholder resolutions and proxy voting to influence the behavior and activities of the firms. A report by Freshfields Bruckhaus Deringer in 2005 concluded integrated issues of environmental, social and governance should be added value to investor’s decision-making process by allows the investors to assess and identify risk and the opportunities related to certain investments which would have gone with noticing (Sullivan et al. 2015, p.14). The practices enable the investors to settle for an informed investment decision and ensure accurate valuation or analysis of the businesses by financial markets. Sullivan et al. (2015, p.4,) argued that taking ESG factors into investor’s decision-making process implies to looking into risks and opportunities which are resulted by investment with regards to climate change, nuclear energy, sustainability, diversity, human rights, consumer protection, animal welfare, management structure, employee relations and executive compensation. For instance, the report provided that investors should analyze how their investment can increase the risks of climate change. In other words, Sullivan et al. (2015, p.14) stated the investors need to include the issues of climate change with their financial calculations. Some countries have even gone ahead to implement environment laws which tax companies which pollute the environments. Australia is one of them which now have carbon tax. On the other hand, integrating issues of environmental, social and governance works as added value to investor’s decision-making process because it enable them to sustainable in terms of their actions (Sullivan et al.(2015, p.14). Companies which investor invests their money sometimes are involved in actions which deplete resources and could risk the lives of next generation. For instance, mining can lead to depletion of various minerals, trees and water. As such incorporate ESG enables investors to project risks and opportunities which come with investments. Sullivan et al. (2015, p.14) opined that the integrated issues of environmental, social and governance also are considered as added value to investor’s decision-making process because they contributes to great liaising and dialogue between the firms and investors on the drivers of value creation and offer incentives to firm to enhance their management and government of ESG factors and motivate investors to actively look for opportunity offered by such issues. Why investors should encourage higher standards of ESG performance in the companies in which they are invested The research has found that just like managers, investors too have fiduciary duty to contribute to high degree of performance of environment, social and governance factors (Johnson 2014). This can be done by investors encouraging high degree of environment, social and governance factors in firms they have invested. Law Commission (2014) argued that the investors can do this by insisting on sustainability reporting. This kind of reporting demonstrates a firm’s commitment to sustainability. Dimitrov and Davey (2011, p.86) asserted that sustainability in the context of business and ethics means balancing fulfilling the needs of the society, making profits, and protecting the natural environment. The report holds that sustainable development within the company should be one which satisfies the present needs of the society but not compromising the capability of the coming generations to satisfy their needs and wants (Principles for Responsible Management Education 2016). Dimitrov & Davey 2011, p. 89) posited that investors needs to encourage high degree of ESG performance in the companies in which they are invested through sustainable reporting since it enhances the green initiatives of the company and its correlations with the clients and investors which satisfies the demand of shareholders for the transparency and accountability. Encouraging higher standards of ESG performance through sustainable reporting is thought to offer a better brand reputation and image (Schaltegger, Bennett & Burritt 2006, p. 34). In a survey conducted in Australia through interview, most respondents stated that issuing of the sustainable reports to the public shows commitment to environment, social and governance factors management like climate change, nuclear energy, diversity, human rights and consumer protection. Sullivan et al. (2015, p.14, p.35) claimed that the process the will improve the image of the company hence attracting other investors. Investors should also encourage higher standards of ESG performance in the companies in which they are invested so as to satisfy the anticipation of employees (Sullivan et al. 2015, p.3). The actions and operations of the company normally affect employees directly or indirectly through pollution and in terms of health issues. For instance, a company which heavily smokes produces green house gases which can be inhaled by the employees hence exposing them to diseases such as asthma. The employees too prefer companies which report sustainable actions in there operation as it depicts the investors as caring of employees health and the society. Brown and Caylor (2009) pointed out that sustainable reporting increases employees’ loyalty. In addition, investors should encourage higher standards of ESG performance in the companies in which they are invested through financial reporting (Sullivan et al. 2015, p. 58) Disclosure of financial reports shows whether the company is involved in CSR or just profit making. In fact, disclosure is one of the tenets of corporate governance that creates a perception that a company is committed to transparency. United Nations Environment Programme (2015) contended that through financial reporting, companies can attract more investors because the practice makes them trust the company with their money. The investors have a responsibility to support the integrity and stability of the financial system The fiduciary duty has bestowed responsibility of supporting the integrity and even stability of the company financial system (Hawley et al. 2014). In fact, the law commission which drafted the fiduciary duties claimed that the investors have the capability and resources to lead the efforts of implementing stability and integrity of the financial system. The investors voting rights give them the opportunity to influence adoption of code ethics or conduct at the organization to govern behavior and operations. According to Brown and Caylor (2009, p.137), the code of conduct not just governs the general behavior within organization, but also enables individual employees to establish professional attitudes towards work. Investors who abide by the code of conduct refrains from financial misappropriation thus maintaining stability of financial system (Generation Foundation 2015). The investors can support integrity through participation in policy development, standard setting and regulation. The good practices should make financial department independent from interference from the investors and the management. In this way, the company will restore the confidence of the employees to discharge their duties in professional manner. Sullivan et al (2015, p.48) claimed that participation in development of the policy and standard setting need to be done in good faith, with honesty and by putting the interest of his company first. This kind of policy can also be referred to as stewardship code (Sullivan et al 2015, p.66). In doing so, the investing will be supporting integrity of the financial system. With good integrity policies the investors would have create an integrity culture. The integrity culture will in return develop a greatly value work settings which focus on employees, customers or the investors, and excels in financial performance (UNEP FI 2009). The investors have a responsibility to support the integrity and stability of the financial system, and this can be done through financial reporting. This practice is normally used to make decision by others investors and even by the company itself. Kay (2012) posited that investors use financial reports to buy company stocks because it shows stability and the potential of the company. Therefore, a company which reports its financial practices gains public confidence. Financial reporting enables shareholders to trust companies with their large sums of money (UNEP FI 2009). United Nations Environment Programme (2015) asserted that investors have a responsibility to support the integrity and stability of the financial system because it enables them makes rational decision on investments. For instance, a company with accurate will know when to make acquisition or to expand its business to another markets. However, without accurate financial information, the company will struggle to support its operation and may finally collapse (Picou & Rubach 2006, p.59). On the other hand, the investors can influence implementation of internal controls to enable financial stability. UNEP FI (2009) contended that internal control normally ensures that resources of a company are directed, measured and monitored. Internal control, therefore, plays critical roles in the detection of and prevention of fraud. Internal control is practiced by adhering to global accounting and auditing standards and practices (Picou & Rubach 2006, p. 60). Conclusion In conclusion, it is evident that the collapsed companies cannot be credited to the manager but to investors too. In fact, based on the research presented on this easy, the biggest blame for failure of companies are rested on investors how have failed their fiduciary duties. The research presented on this essay has found out that investors should integrate environmental, social and governance factors in decision-making process to enable them identify financial risk and the opportunities. Similarly, the essay has established that investors need to encourage higher standards of ESG performance within firms they have invested to enhance other investors’ confidence with the company. Lastly, the essay has broadly discussed and found that investors too have the responsibility of supporting the stability and integrity of financial system so as to gain public confidence with the company. References Brian, J.W, Singhal, V.R, & Subramanian, R 2010, An empirical investigation of environmental performance and the market value of the firm, Journal of Operations Management, Vol.28, pp. 430-441. Brown, L & Caylor, M 2009, Corporate Governance and Firm Operating Performance, Review of Quantitative Finance and Accounting, Vol.32, No. 2, pp.129-44. Dimitrov, D.K & Davey, H 2011, Sustainable development: what it means to CFOs of New Zealand, Asian Review of Accounting, Vol.19, No.1, pp.86‐108. Generation Foundation 2015, Allocating Capital for Long-Term Returns: The Strengthened Case for Sustainable Capitalism, Generation Foundation, London, Viewed 12th June 2016 https://www.genfound.org/media/pdf-genfound-wp2015-final.pdf Hayat, U & Orsagh, M 2015, Environmental, Social, And Governance Issues In Investing: A Guide for Investment Professionals, CFA Institute, pp. 1-43. Hawley, J, Hoepner, A, Johnson, K, Sandberg, J & Waitzer, E 2014, Cambridge Handbook of Institutional Investment and Fiduciary Duty, Cambridge University Press, Cambridge. Johnson, K 2014, Introduction to Institutional Investor Fiduciary Duties, IISD, Winnipeg, iewed 12th June 2016 http://www.reinhartlaw.com/Documents/art140402%20RIIS.pdf Kay, J 2012, The Kay Review of UK Equity Markets and Long-term Decision Making, Final Report – July 2012, Department for Business, Innovation and Skills, London, Viewed 12th June 2016 http://www.bis.gov.uk/assets/biscore/business-law/docs/k/12-917- kay-review-of-equity-markets-final-report.pdf Law Commission 2014, Fiduciary Duties of Investment Intermediaries, HMSO, London, Viewed 12th June 2016 http://www.lawcom.gov.uk/wp-content/uploads/2015/03/lc350_ fiduciary_duties.pdf Picou, A & Rubach, M.J 2006, Does good corporate governance matter to institutional investors? Evidence from the enactment of corporate governance guidelines, Journal of Business Ethics, Vol. 65, pp. 55-67. PRME - Principles for Responsible Management Education 2016, Six Principles, Viewed 12th June 2016 http://www.unprme.org/about-prme/the-six-principles.php Psaros 2009, Australian corporate governance: A review and analysis of key issues, Pearson Education Australia, pp.43-53. Schaltegger, S, Bennett, M & Burritt, R 2006, Sustainability Accounting and Reporting, Springer, Dordrecht. Sullivan, R, Martindale, W, Feller, E & Bordon, A 2015, Fiduciary Duty in the Century 21, United Nations Environment Programme for Finance Initiative, Viewed 12th June 2016 My Documents\Downloads\Documents\fiduciary_duty_21st_century.pdf United Nations Environment Programme Finance Initiative [UNEP FI] 2009, Fiduciary Responsibility: Legal and Practical Aspects of Integrating Environmental, Social and Governance Issues into Institutional Investment, UNEP FI, Nairobi, Viewed 12th June 2016 http://www.unepfi.org/fileadmin/documents/fiduciaryII.pdf United Nations Environment Programme 2015, Aligning the Financial System with Sustainable Development: Pathways to Scale, UNEP, Geneva, Viewed 12th June 2016 http://apps.unep.org/publications/index.php?option=com_pub&task=download&file=011401_en Read More