As vague as the “S” element in ESG (Environment, Social, and Governance) seems to most investors, social standards are no less important than environmental and governance factors. We think that, as businesses step up their commitments to social standards, the efforts will translate to greater profit and strengthen organisational resilience againsts risks.
There are many facets to what “S” stands for, among them gender and racial equity. But if one were to take a closer look at many corporates, particularly those in the engineering, mechanical, and traditionally male-dominated industries, their annual reports would show that board seats are largely occupied by men, while women are underrepresented. In most cases, women get their mentions in the reports simply because of their family ties with the CEO.
But numerous studies have shown that women typically make better investment decisions than men, and are able to generate stronger returns. For example, the University of California Berkeley’s Haas School of Business examined the investment performance of 35,000 families from 1991 through 1997, and found that women investors made an excess of nearly 1% in returns compared with their male counterparts.
Similarly, a study done by the University of Warwick in 2018 found that female investors outperformed men by 1.8% in annual returns for three years. The research project tracked investment performance of 2,800 men and women investing with Barclays using variables including investment decisions, age, trading frequency and investment capital2. One possible explanation is that, women investors could be more sensitive to risks, while most men would rather pursue the thrill of investing.
From whether a new product is worth developing to questions around expanding manufacturing capacity, the responsibility of making investment decisions like these falls on the shoulders of companies’ board members. If we could infer a conclusion from the studies highlighted above, gender-balanced boardrooms will potentially be better placed to steer companies towards smarter investment judgements.
The “S” in ESG is short for social, but there’s no single definition. In some cases, the social element could be extended to cover stakeholder engagements. From employees, suppliers, clients to investors, we think they are all important stakeholders’ businesses should communicate with. The following example shows just how failing to consider the interests of all stakeholders could jeopardise a company’s growth.
German automaker Volkswagen Group suffered a major setback in the diesel gate scandal in 2015 over its negligence of stakeholders. The group’s CEO, while an ambitious leader, was not particularly accustomed to employee communication, and was known for an authoritarian management style that inspired fear in his subordinates. In order to meet the promise he had previously made to shareholders of making Volkswagen the world’s top car manufacturer, he imposed immense pressure on the engineering division to roll out a diesel engine that would comply with global exhaust emissions regulations.
Without any meaningful communication channels with their superiors, engineers who knew full well that they wouldn’t meet emissions requirements went ahead under soaring pressure and developed a defeat device that sidestepped exhaust emissions testing. Before the emissions cheating scandal came to light, Volkswager had at one point become the biggest automaker globally. But the truth always comes out. The revelation resulted in Volkswagen’s share price plunging by 40%, and the resignation of its then CEO.
One main takeaway of the scandal is that, only companies committing to upholding ESG standards would be the ones that respect the rights and opinions of all stakeholders, maintain prudent risk management, and achieve sustainable growth. We also think these cases could offer equity analysts insights into how company analysis can be incorporated with an ESG lens, and through that, a broader perspective to consider opportunities and risks.
 Source: Forbes, as of Dec 2018
 Source: WBS, as of June 2018
 Source: The Beijing News, as of Sept 2015
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