Exploring the “G” of ESG Investing: The Role of Governance in Socially Responsible Investing

Amanda Wallace is excited about the “G” of ESG investing. Her work as Managing Director at J.P. Morgan Asset Management heavily involves the governance factor of the Environmental, Social, and Governance principles that drive socially responsible investing. The environmental components of ESG are well known, including climate change and greenhouse gas emissions, air pollution, water security, and waste disposal considerations. Many people are also familiar with social metrics that include human rights, labor standards and working conditions, and gender and diversity. But governance factors – including board composition, management structure, succession planning, and employee relations and compensation – are metrics that, while less frequently discussed, are equally important. Responsible governance can ensure the long-term viability of an investment, particularly when considering infrastructure assets.

The viability of our nation’s infrastructure is directly tied to our ability to adapt to our changing climate, and investments should reflect climate considerations. Water infrastructure and electric and natural gas distribution systems are services that communities heavily rely on. Long-term considerations of increasing extreme weather events and energy transitions should be central to infrastructure investments. Not taking climate change into account when leading an investment firm is ultimately a governance failure, Wallace asserts. How can we shift the perspective in investing from quarterly reports to long-term planning to reflect this reality? This is a question that Wallace, who leads J.P. Morgan’s Fund Executive Team, considers often.

Investing, she reminds us, is not philanthropy. Firms have the obligation to get the highest return on investment when considering their options. But seeking returns does not have to compete with planning for climate change. Rather, it is critical that investment boards make responsible decisions that take into account the uncertainty about the future transition to a low-carbon economy. Ensuring that board members are aware of future climate risks is one way to strengthen a firm’s governance. This “G,” and ESG in general, Wallace says, improves resiliency in investments and can help to drive resiliency across the U.S.