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The impact of ESG investing

There is no question that ESG and sustainability are amongst the most important issues in business today. Public companies the world over report on their sustainability footprint either as part of regulatory compliance or stakeholder governance. And far from just being confined to a particular division or unit, at many of these companies, sustainability is flowing into product development, marketing, finance, and even operations, in efforts to transition to a low-carbon economy.

 

According to Bloomberg Intelligence’s (BI) ESG 2021 Midyear Outlook report, environmental, social and governance (ESG) assets are on track to exceed USD50 trillion by 2025, up from USD35 trillion in 2020. ESG assets already represent more than a third of total global assets under management. The same report also adds that it expects to see a USD1 trillion ESG ETF market and a USD11 trillion ESG debt market, also by 2025.

 

ESG takes sustainability beyond just the preservation of the environment or natural capital, and expands the mandate to include social and human capitals, while ensuring that governance is upheld to promote trust, accountability and ethics in business practices. While there is no single global set of standards or framework to adopt, there are several international benchmarks to refer to. The United Nations has its Sustainable Development Goals (UNSDGs), while the Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB) help with communicating sustainability metrics and financially-material sustainability information.

 

For most organisations around the world, setting and working towards carbon reduction targets is the most common sustainability strategy. Companies are reducing their carbon emissions by optimising supply chains, procurement, and business operations. For many businesses, this would include examples like reducing packaging material, optimising logistics for smarter deliveries, eliminating unproductive travel, and opting for more remote working to minimise the carbon footprint of commuting.

 

More and more companies are beginning to recognise the importance of encouraging diversity in the workplace. This can be clearly seen as more and more companies are ensuring that their Boards are more diverse and that minority groups are well represented in senior management and leadership positions. Corporate culture is also evolving to embrace sustainable precepts like inclusivity in the workplace, work-life balance, and greater corporate citizenry to society at large.

 

The ESG investing movement also creates a different lens of focus on top-down investing. There are clear benefits that accrue from the close alignment between ESG integration at the company level and the top-down investment management philosophy that looks at risks and issues outside of financial statement analysis.

 

However, significant concerns do surround the ESG movement also. The lack of any harmonisation between the different standards, frameworks, guidelines, and the proprietary rating methodologies of different ESG rating agencies globally, make comparability across countries and companies incredibly difficult.

 

Then there is greenwashing—where companies provide misleading information or unsubstantiated claims regarding their products or sustainability profile. The lack of sufficient oversight and harmonised global standards makes it difficult to police these types of abuses. Furthermore, many investors rely heavily on a fragmented ecosystem of ESG rating agencies that have their own scoring system and are not yet operating at a global scale.

 

Despite some of the pitfalls, the ESG investing phenomenon is here to stay. The natural evolution and development of this movement will see the sector mature over time. Meanwhile, more assets under management will ultimately flow into the ESG space as stakeholder activism drives a greater need for a more sustainable future.

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