The Importance of ESG Governance: Reflecting on Enron 20 Years Later

Twenty years ago this summer, Enron, America’s seventh-largest corporation at its height, spiraled into bankruptcy, uncovering an underbelly of fraudulence and corrupt practices. Twenty years on, the focus on sound governance practices as part of the growing awareness of ESG is as important as ever.

Enron’s collapse saw billions of dollars wiped out, with its employees bearing the brunt of the burden, reports Forbes. In addition to losing jobs and healthcare coverage, many also lost their retirement savings, which had been invested in the company. Out of it came the Sarbanes-Oxley Act of 2002, which worked to fight fraud, improve the transparency of financial reporting, and re-build investor confidence.

The transparency and oversight that is practiced these days works to prevent fraudulent activity. Executive leadership faces the very real pressure to continue evolving in sustainable ways, not just in an environmental capacity but by using ethical business practices to produce real and lasting growth.

“A company that begins setting a long-term strategy to transition its revenue and workforce into greener pastures may experience uneven profitability in the short term. But that doesn’t impair the entity as a going concern; rather investors may award a premium valuation for above-market growth prospects well into the future,” said Martin Jarzebowski, Director of Responsible Investing at Federated Hermes, and author of the Forbes article.

“Social issues are no less important than environmental ones, and thinking myopically about profits at the direct expense of people’s welfare can come back to hurt you,” he added.

‘EFIV’ Invests in All Areas of ESG

The SPDR S&P 500 ESG ETF (EFIV) takes a holistic approach to ESG, by not only focusing on the environmental aspect, but on sustainability across the social and governance practices of the companies it invests in as well.

The fund tracks the S&P 500 ESG Index, an index that selects from top companies that meet ESG criteria within the S&P 500, while also adhering to the sector weights of the S&P 500 Index.

EFIV utilizes SPDJI ESG scores to rank companies based on their sustainability. This score is derived from analyzing a thousand data points covering a variety of topics collected from companies and then asking roughly 120 questions, according to the S&P Global website.

EFIV excludes companies involved in tobacco, controversial weapons, those that derive 5% or greater of their revenues from thermal coal extraction or generate power from coal, or that score low in United Nations Global Compact standards.

The ETF’s top three sector allocations include 30.42% in information technology, 13.94% in consumer discretionary, and 13.06% in healthcare, as well as several other smaller allocations.

EFIV has an expense ratio of 0.10%, making it one of the cheapest ESG ETFs on the market.

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