Question

PHITBIT Limited is aware that the funds for this tendered project will need to be raised from external sources. Investors are increasingly savvy and applying non-financial factors as part of their analysis process to identify risks and growth opportunities. The finance director is well aware that adopting a culture of ESG investing and analysis helps deliver performance and creates value to owners and other stakeholders. Some of these benefits may not be integrated into conventional investment appraisal method, such as the Net Present Value approach applied to this new production proposal. You have been tasked to investigate the potential Environmental, Social and Governance (ESG) impact of this project on the aspects of the business and markets, alongside the traditional financial measures applied in this investment appraisal.

(a) Explain EGS investing, and critically discuss how Environmental, Social and Governance (ESG) factors should be addressed, in relation to the proposed new production project.

(b) Critically discuss THREE non-quantifiable potential benefits that could result from PHITBIT Limited’s ESG responsible investing in part (a).

Answer 1

What Are Environmental, Social, and Governance (ESG) Criteria?

Environmental, social and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

ESG investing is sometimes referred to as sustainable investing, responsible investing, impact investing, or socially responsible investing.

How Environmental, Social, and Governance (ESG) Criteria Work (FACTORS)

Environmental criteria may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks. For example, are there issues related to its ownership of contaminated land, its disposal of hazardous waste, its management of toxic emissions, or its compliance with government environmental regulations?

Social criteria look at the company’s business relationships. Does it work with suppliers that hold the same values as it claims to hold? Does the company donate a percentage of its profits to the local community or encourage employees to perform volunteer work there? Do the company’s working conditions show high regard for its employees’ health and safety? Are other stakeholders’ interests taken into account?

With regard to governance, investors may want to know that a company uses accurate and transparent accounting methods and that stockholders are given an opportunity to vote on important issues. They may also want assurances that companies avoid conflicts of interest in their choice of board members, don't use political contributions to obtain unduly favorable treatment and, of course, don't engage in illegal practices.

(B)

THREE non-quantifiable potential benefits that could result from PHITBIT Limited’s ESG responsible investing in part-

ESG FACTORS MAY MATERIALLY IMPACT INVESTMENT RISK AND REWARD.

Businesses do not operate in a vacuum. In a global economy dependent on crossborder trade, complex supply chains and diverse workforces spanning the globe, companies are increasingly confronted with environmental issues, such as climate change, water scarcity and pollution, as well as social factors including product safety and relationships with regulators and the communities in which they operate. In this context, ESG can directly impact a company’s competitive positioning. Therefore, managing environmental and social factors is simply part of sustaining competitive advantage in today’s economy.

ESG RISK EVENTS HAVE MATERIALLY DETRACTED FROM PERFORMANCE.

In recent years, shareholders have suffered substantial losses following ESG risk events .The negative environment and social impacts of oil spills, mining explosions and unsafe products can be fatal, and the cost to shareholders can be severe. In addition, poor governance and accounting controls can undermine the success of even great businesses characterized by sustainable competitive advantages and long-term growth prospects. While there is no silver bullet to avoid such catastrophes, we believe that incorporating ESG analysis can mitigate these risks.

ESG Growing in Importance Opportunity Strategies, available on a Global, International and Asia ex Japan basis, are managed by the Global Opportunity all over the world. supported by a Corporate Governance Team comprised of professionals responsible for proxy voting, shareholder engagement and environmental, social and governance initiatives across the Investment Management community of independent boutiques