It’s easy to dismiss ESG (environmental, social and governance) investing as a fad. Certainly there has been a backlash in 2022 after a period where slapping those three letters next to any investment seemed to guarantee double-digit gains

According to data from Morningstar, US funds with a sustainability focus underperformed a weak wider market by nearly 2% in the first six months of the year.

A dose of healthy scepticism is probably warranted, particularly as claims of so-called greenwashing mount. The CMA (Competition & Markets Authority) has launched a probe into whether clothing retailers ASOS (ASC:AIM), Boohoo (BOO:AIM) and George at Asda are delivering on the green claims they have made for themselves.

Certainly there has been a tendency for businesses to pay lip service to the concept of ESG without backing it up with serious action.

However, investors could pay a heavy price for ignoring ESG factors entirely. In particular the ‘G’ in ESG, often neglected in the wider analysis, is hugely important.

WHY GOVERNANCE IS ALL IMPORTANT

In a broader discussion which will feature in a future article in Shares, the manager of BlackRock World Mining (BRWM) Evy Hambro observed: ‘Out of the three letters I say G is the most important. This is effectively the board and the board are the ones who employ the executives which run the company and they are the ones who affect the E and the S.’

There was a recent reminder of how important the way a business is run is to shareholder returns at JD Sports (JD.).

Despite a recent recovery, the shares are trading 100p or more than 40% below their all-time highs above 230p reached in November 2021.

COSTLY MISTAKE

Naturally, concerns about the cost-of-living crisis have hit all retailers but JD has also been the author of its own misfortune, the 2019 acquisition of rival Footasylum proving extremely costly, and not just in financial terms.

At the behest of the CMA the company is selling a business it agreed to buy for £90 million in 2019 to a German asset manager for £39 million.

However, the fall-out from the debacle and the investigation by the competition authorities also saw the departure of executive chairman Peter Cowgill.

To give him due credit, Cowgill had run JD with real success over a long period but the Footasylum deal hinted at a lack of internal challenges to decision-making at the top.

Certainly JD appeared to think so given their push to split the chair and CEO roles both held by Cowgill, a move which was reportedly the catalyst for his resignation in May 2022.

Plans are afoot to hire a new chief executive and bring in a fresh structure and internal controls to ensure the business is run with the appropriate rigour in the future.

About time too. Sooner or later, if there are problems at the top of a business it will hit the buffers.

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