A question of governance and risk
While the environment and social sides of ESG are easily understood, governance can feel a little more nebulous. It comprises multiple aspects of corporate behaviour, including business ethics, corruption and instability, anti-competitive practices, and ownership.
According to research by MSCI in February 2021, companies with strong corporate governance had significantly better profitability, lower stock-specific risk, and lower systemic risk. Meanwhile, those with less boardroom diversification and less transparent, scrutinised practices, or those that don’t respect or promote workers’ rights, all perform poorly in comparison.
“At Coutts, being purpose-led helps us identify risk,” stated Karen Ermel, Director, Responsible Investing at Coutts. This starts by looking closely at a company's governance measures and ensuring adequate regulatory oversight to filter out funds that do not meet set standards or are below industry averages for particular ESG factors. Considering everything from inflation and interest rates to diversification helps assess a company or fund's suitability for responsible investors, Karen added.
Indeed, in prioritising governance, Coutts has reduced their exposure to Russia, says Leslie Gent, Head of Responsible Investing at Coutts. “We stay on top of the issues, have a good understanding of the risks in our portfolios, and try to size those risks appropriately.”