Our paradigm on ESG and its 9 operational components
Our paradigm on ESG is based on refining the concept of ESG as derived from the Firm/Market Paradigm in Economics, with three sub-categories on each of its three components.
For E, we shall refer to green assets; green operations and green innovations.
For S, we shall refer to social enjoyment; social investment; and social enlightenment.
For G, we shall refer to governance to all shareholders; governance to all staff; and governance to the industry globally.
ESG – i) Green Assets
By E, we mean the physical environment of the earth which we would see as one main dimension of the Market that the Firm is facing. By Green Assets, we mean those hard operating assets used by the Firms in their business process should match the green and sustainability standard as much as possible. And by green, we think that should extend beyond the Carbon Net Zero requirement and should encompass many other things as well such as energy consumptions; resources treatment of all kinds, bio-diversity etc.
Hence, for the property industry, the assets shall refer to mainly the buildings; for the aviation industry, it shall be mainly about the aircrafts; for the manufacturing industry, it shall be mainly about the plants; for the hotel industry , it should be mainly about the hotels etc.
ESG – ii) Green Operations
By Green Operations, we mean that the operating process of the business should meet the requirements related to the green and sustainability standard as much as possible. However, pursuant to the Firm/Market paradigm, the world should really be seen as composed of bundles of contract and it is very hard to specify where the company’s operating process ends.
As such, we think the operation of the companies should encompass both their downstream and upstream extensions too. Therefore, in addition to the companies’ internal operation, their green requirements should extend both upstream and downstream to include the procurement process; production process, sales and distribution process etc.
ESG – iii) Green Innovations
By Green Innovations, we mean all those innovations in the business process which would work towards enhancing the green and sustainability standard achieved. Again, pursuant to the Firm/Market paradigm, the world is indeed composed of bundles of contract and it would be hard to specify where the company’s business ends. We therefore expect that the company’s innovations to have both downstream and upstream extensions as well.
One example in the property industry would be about using ways to engage tenants and customers to be more green-oriented in mindsets and in all of their daily activities.
ESG – i) Social Enjoyment
By Society, we mean the human environment faced by the companies which is arguably the most important Market faced by them. For Social Enjoyment, we mean companies should deliver products or services that should at least bring enjoyment and meet the expectations of their customers. And we think this would presuppose that the products and services need to be safe and genuine and without misrepresentations.
This would be most obvious in the consumer industry where the products and services of the company shall bring direct satisfaction to the end-user consumers. And the level of enjoyment achieved by the customers should constitute one main criteria where the Social Enjoyment achieved by the company will be measured.
ESG – ii) Social Investment
By Social Investment, we mean activities which would help to enhance the future enjoyment and potential of the society. We concur with the view of Schumpeter that at the heart of capitalist market economies is “Creative Destruction” and that the society needs to keep investing in creating new things and innovations which can bring the society to the next level.
We think Social Investment would include anything which can enhance the company and the society’s ability to create and innovate and to prepare for the future. Investments related to R&D; the training of talents; areas which can help facilitating the society to transform to the next level and to seize new opportunities should be among the examples.
ESG – iii) Social Enlightenment
By Social Enlightenment, we mean activities which would help to enlighten the society. Here we concur with Adam Smith that life is not merely about material wealth and self-interest and that mankind is a creature capable of virtue that wealth should have a spiritual dimension on top of a material one.
We think Social Investment would include anything which can enrich and enlighten the society. This would include helping to “lift the poor out of poverty” ; promoting human wellness (eyesight, hearing, mobility etc) ; fighting against injustices and inequality; or all the things which would enhance “prudence”, “justice”, “benefience”, “equality” , “virtue” and “happiness” in the society, to quote Adam Smith.
ESG – i) Governance to all shareholders
By Governance to shareholders, we refer to responsibilities towards all shareholders whether it be the controlling families or what value investing master Martin Whitman has called the OPMI – Outside, Passive Minority Investors.
We think one main measure of governance to all shareholders should be that of treating all shareholders as equal and seeing providing respectable and sustainable return to all providers of capital as a duty and responsibility of the company and not something out of the management’s benevolence . We think another hallmark would be seeing OPMI in the company as like “business partners” of the company and to be as honest and candid as possible, as Warren Buffett has suggested. We think this is the way to foster the maximum alignment of interests between the companies and their OPMI.
ESG – ii) Governance to all staff
By Governance to staff, we refer to equal treatment for all staff irrespective of genders, race, age etc.. and the provision of a safe and equitable working environment to all staff, which shall include management and non-management. Pursuant to the Firm/Market Paradigm, the relation between a company and its staff, arguably, can also be seen also “bundles of contracts” and we concur with Schumpeter that one way to see “entrepreneurial profit”, is to see it as “the expression of the value of what the entrepreneur contributes to production”.
Against this background, we think it is fair to expect that staff should be given a equitable share of the company’s profits and that it would make commercial sense for staff and company to invest in each other. In this light, we would see schemes whereby staff can take on the position of shareholders and investors as something that is worth pursuing for all companies.
ESG – iii) Governance to the industry globally
By Governance to the industry globally, we refer to practices and activities which would help to advance the potential of the entire industry as well as all entities which are part of the industry process. Pursuant to the Firm/Market Paradigm, it is arguable that all companies in the industry globally have entered into again “bundles of contracts” whereby they collectively compete with other industries for a share of the economic pie globally.
In this light, we think it is only fair for companies to be recognised for the contribution they have made to the enhancement of the economics and economic potential of the industry globally. One major hallmark would be initiatives and activities of companies which set new and better standard for the industry and would increase social recognition and the economic potential of the industry globally.