ESGvolution

Christopher Raggett, Co-Head of Corporate Finance:

“ESG” is an acronym that has taken root in the global lexicon and to some seems at odds with the traditional view that profit is the only legitimate corporate goal. But in reality, the rise of the “company” as a corporate personality with its own rights meant that the evolution of attendant responsibilities was inevitable and, therefore, here to stay.

Any aspiring lawyers (if such a thing still exists) will know that the concept of the “company” as a separate legal entity dates back to a landmark case of Salomon v Salomon in 1897 when the law lords found that the eponymous business owner could not be held liable for the debts of his company. Useful as that was for the broke shoe salesman it was a portentous first step to today’s complex corporate structures and the beginning of the concept of a company as a separate “being” with its own obligations and liabilities.

At the time Salomon seemed only to protect entrepreneurs from their failures, but by giving a company a legal basis it raised the inevitable question as to whether an entity can exist with rights but without responsibilities.

The answer is that it cannot.

However, for most of the last century a company was only responsible to its shareholders in its pursuit of maximising profits for the benefit of its owners. Little if any at all thought was given to the “greater good” of the wider stakeholder community, employee rights, community affairs or environmental concerns. These issues were only really addressed if they would also have a beneficial impact on profits and shareholder returns. Indeed, this approach was enshrined for a long time in law. Only relatively recently, in 2006, was a directors’ duty expanded beyond his shareholder to include “all stakeholders” and the “company as a whole”.

A collective desire for accountability has driven the responsibilities of a company beyond the narrow focus of “returns”. From attempts in the 1980s to sue for corporate manslaughter, to US class actions for environmental crimes, to fines regularly imposed by regulators nowadays for breaches of their rules – the corporate entity is increasingly being held to account for the way in which it conducts itself.

This trend accelerated following the Global Financial Crisis of the late 2000s which laid bare the excesses the financial community was able to enjoy through corporate over-engineering and a lack of true financial accountability on an individual level. The light shone on environmental disasters such as Macondo and oceanic pollution have further led to increased activism and social awareness. Even today this march continues and Covid-19 and demands for increased diversity and inclusivity will further shape the business narrative.

In short, corporate social responsibility is now at the forefront of consumers’ minds. We now more than ever before seek to hold the companies with whom we interact to greater account. It is no longer enough to as Google once said “don’t be evil”. We want more, we want “be good”.

And as a result, no longer are companies driven solely by profit and shareholder returns, and no longer are they assessed solely by these metrics. Instead, directors are increasingly aware of the “greater good” and the broader impact of their companies on the environments and communities in which they operate.

While that is an overarching truism, ESG still means different things to different people. But it is evolving to covers three distinct strands – environmental sustainability, social/ community engagement and overall corporate governance (and inclusiveness). Underlying this is an emerging corporate sub-culture – impact investing. That is, investing in companies whose whole purpose is to “be good”. To some these may seem like relatively new trends, but in reality, they have been inevitable since the company developed rights, a personality and with them, social responsibility.

The rise of ESG as a concept, investment thesis and general approach has been inexorable. And it is here to stay.

Over the coming few months, finnCap will begin exploring some of the sub sectors that align themselves most with ESG and long-term impact investing.