Sustainable investing, ESG, impact investing – these have become common terms over the last few years. Even the CEO of BlackRock, Larry Fink, has joined in, referencing sustainability 15 times in his 2021 letter to CEOs. It is clear that industry leaders like BlackRock, JP Morgan, and Fidelity strongly believe sustainable investing will continue to play an expanding role in the coming decades.
For an investment strategy that really entered the market in the mid-2000s, ESG has grown to command a strong following of institutional and retail investors alike. A 2018 survey by EY found that 97% of respondents completed some kind of ESG review of companies before investing. This is massive, meaning poor ESG performance, or just poor reporting, can have a significant impact on the bottom line. Furthermore, a review of 2020 found that globally $288 billion was invested into sustainable assets, which is a 96% increase over 2019.
And businesses have taken notice. Between 2011 and 2020 the number of S&P 500 companies publishing ESG reports went from 20% to 90%. As with trends in the business world, we can expect smaller companies will follow suit in the coming years.
Growing Demand for Corporate Sustainability
Sustainable investing is around to stay, and the value placed on ESG factors will continue to accelerate. Not only is this a requirement to limit climate change impacts and meet national sustainability targets, but it is being demanded by investors.
Taking a closer look at the driving factors of the transition is a crucial step in understanding how to capitalize on it. Ultimately, there are several processes happening, but a few notable factors are:
- We understand that climate risk equates to investment risk
- More data shows that ESG is directly linked to financial success
- Government policies and sustainability targets are demanding it
Climate Risk & Investment Risk
Climate risk represents a real concern for companies across all industries. From supply chain disruptions to stranded assets, the ripples from a single event can be seen across the globe. This became very apparent in 2020 with the COVID 19 pandemic. While it was not directly a climate related issue, it is a realistic proxy.
The supply chain disruptions caused by COVID 19 caused massive delays, setbacks, and production issues. This is particularly true in the microchip industry, which some analysts believe won’t catch up to demand for another 2 years. Now more than ever investors see the link between these risks and investment risks.
ESG is Linked to Financial Success
The long-held argument that there is not enough data to link ESG and financial success is coming to an end. A 2017 study by Nordea Equity Research (the largest financial services group in the Nordic region), found that between 2012 and 2015, the companies with the highest ESG ratings outperformed the lowest-rated firms by as much as 40%. Another study by MSCI found that companies in the bottom 10% of ESG ratings were much more likely to have a significant crash in stock price compared to their higher rated peers. These types of conclusions are seen time and time again in case studies, academic reviews, and financial research.
Government Involvement in ESG Will Grow
Government policy has played, and will continue to play, a central role in driving sustainability. Already, 59 countries, representing the world’s largest economies, have pledged to net-zero carbon targets. Major weight will be placed on industry to help meet these goals. And in this pursuit countries will have to develop more carbon emission and sustainability requirements for businesses.
The Future of ESG Reporting
These updated requirements will come in many forms, yet already one of the most apparent is government oversight in ESG reporting. Currently, companies track and report ESG metrics using a range of frameworks like the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and UN Sustainable Development Goals (SDGs). And for the most part, governments don’t interfere. The issues arise with the inherent differences between reporting frameworks, which can lead to very different ESG scores for the same business. Ultimately, this damages the integrity of ESG investing itself.
In 2020 the US Securities and Exchange Commission (SEC) Investor Advisory Committee wrote a memo to the SEC recommending the government take control of ESG disclosure in the US. Similar sentiment has been hinted by the Biden administration appointments to the SEC, of which several are proponents of stricter ESG oversight.
This changing field makes effectively capitalizing on sustainability a challenging process for both businesses and investors. Yet it represents a massive opportunity to ride the current growth of sustainability throughout the markets. We believe that developing an effective ESG or sustainable investing approach demands a unique industry experience – there is no one size fits all strategy.
Here at Mashora Group, we understand these challenges and their nuances – we deal with them firsthand on a daily basis. That is why we are in a unique position to support you. Whether you are developing a new ESG strategy or improving your sustainable investment portfolio we have industry experts ready to provide the support you need.