It is widely understood that responsible investing integrates environmental, social, and governance (ESG) factors into the investment and decision-making process. These ESG investing factors cover a wide range of issues that are not traditionally a part of financial analysis, however, they may have financial relevance. Including:
- How corporations respond to climate change
- How well they handle water management
- How they treat their work
- How effective their health and safety policies are in protecting against accidents
- How they manage their supply chains
- Whether or not they have a corporate culture that builds trust and innovation.
A landmark study (“Who Cares Wins”) first coined the term ESG in 2005. Today, it is estimated at over $20 trillion in AUM or around a quarter of all professionally managed assets globally. It’s rapid growth builds on the Socially Responsible Investment (SRI) movement, which has been around much longer.
However, unlike SRI, which is based on ethical and moral criteria and uses mostly negative screens, like not investing in alcohol, tobacco, or firearms, ESG is based on the assumption that ESG factors have financial relevance.
Back in 2018, thousands of professionals from around the globe held the job title of “ESG Analyst”. Furthermore, ESG investing was the subject of news articles in the financial pages of the world’s leading newspapers.
Many investors recognize that ESG information about a company is vital to understanding it’s corporate purpose, strategy, and management quality. The rise in ESG investing is remarkable. But what does it mean for the future?
Future of ESG Investing
Today, many seek to advance the integration of ESG into analysis and decision making through thought leadership and the creation of tools, guidance, and engagement.
The Sustainable Stock Exchange Initiative (SSEI) now mandates ESG disclosure for listed companies and provides guidance on how to report on ESG issues. However, it hasn’t all been smooth sailing for ESG investing.
Initially, many were reluctant. They argued that their fiduciary duty was limited to the maximization of shareholder values irrespective of environmental or social impacts, or broader governance issues like corruption.
Amazingly, some people are still clinging to these arguments. Since evidence that ESG issues have financial implications has grown, many have accepted its validity. In many important markets, including the U.S. and the EU, ESG integration is seen as a part of fiduciary duty more and more.
Improvements in Data and Tools
Since the launch of the Global Reporting Initiative in 2000, corporate disclosures on ESG issues has steadily improved. Today, 80% of the world’s largest corporations use GRI standards. Recently, the US-based Sustainability Accounting Standard Board (SASB) and the International Integrated Reporting Initiative (IIRC) have helped advance industry sector-specific reporting and its relevance for investors.
Overall, the market for ESG information is maturing and the quality is improving steadily. Furthermore, new technology based on machine learning and big data is already unlocking valuable insights and offering easy ways to apply ESG data in addition to conventional financial information.
Accelerated Growth of ESG
While it was steadily growing, ESG investing was greatly accelerated around 2013 and 2014. This is due to the first published studies showing that good corporate sustainability performance is linked with good financial results. Academics like Bob Eccles and George Serafeim showed the importance of ESG information for assessing corporate strategies, risks, and operational performance.
Now, the idea that investors who integrate corporate environmental, social and governance risks can improve returns is rapidly spreading across capital markets everywhere. The global investor community has developed a range of methods for integrating ESG information, some are outlined here.
Just a Fad?
Some may argue that responsible investing is just a fad, but take a closer look at the driving forces behind the movement over the past 15 years and you will see otherwise. Technology and transparency are here to stay.
Data collection and processing will become easier, and therefore cheaper, while smart algorithms will increasingly allow for better interpretation of non-traditional financial information.
Furthermore, environmental changes will put a growing premium on good stewardship and low carbon practice because natural assets will increase in value over time. Lastly, technology has empowered people everywhere.
ESG investing allows them to express their own values while ensuring that their savings and investments reflect their personal preferences. And the best part is, they don’t have to compromise on returns.
It will be challenging for corporations to adapt to a new environment that prefers smarter, cleaner, and healthier products and services. ESG factors will become increasingly important to investors searching for a well-positioned company and avoiding the ones likely to underperform or fail.
ESG investing offers these people the opportunity to vote with their money. For policy makers, it should be a welcome market-led development that will ensure the common good isn’t lost in short-term profit making.
Schedule a Consult for ESG Investing in Northern Virginia
ESG investing is more popular now than ever before. It has matured to a point where it can greatly accelerate market transformation for the better.
If you are interested in learning more about ESG investing and how it can help you, please contact us online or call (833) 568-4900 today.