What does it all mean?
According to the Global Sustainable Investment Alliance, over $22 trillion of assets were managed under responsible investment strategies globally in 2016, up 25% from two years before. Used interchangeably with sustainable investing, socially-responsible investing (SRI), or mission-related investing, ESG investing incorporates environmental, social, and governance factors within the investment decision-making process. This shift represents a proxy for how societies are changing, which challenges corporations to adapt to a modern environment that favours smarter, cleaner, and healthier products and service processes.
What’s causing the shift, and why now?
The expansion of ESG focus has come synonymously with the changing nature of the world we live in. As we watch wildfires engulf entire towns in California, we are again reminded of the increasing global pressures that we face; the up and coming generations are now demanding more from their money, and the landscape is responding. A 2016 Bank of America report stated that the following decades could see millennial’s putting $15-$20 trillion into US-domiciled ESG investments, and this trend can be observed globally.
“This virtuous combination of burgeoning demand and investment rationale will drive the ESG asset pool’s rapid growth…ESG outcomes are likely to become an integral part of investment solutions, and ESG analysis an essential investment tool”
PwC Report, ‘Asset & Wealth Management Revolution’
Facilitating this shift is the improved research and analysis capabilities which have allowed for a more systematic and quantifiable approach to understanding ESG factors. The MSCI ESG Research and The International Integrated Reporting Council (IIRC) are examples of how these have helped unlock valuable insights that have previously been absent from conventional financial information. As corporations begin to seriously integrate good ESG practices, the nature of competition allows for market-led changes to act as a force for good on a huge scale.
Differentiating ESG from Impact Investing
E - Referring to a company’s environmental impact, such as their carbon emissions.
S - Referring to a company’s social impact, whether it be their commitment to community projects, or the promotion of workplace diversity.
G - Referring to a company’s governance, looking at its business ethics, tax transparency, or board diversity.
This investment market offers diverse and viable opportunities for investors to provide capital to advance socio-environmental solutions. The UK, believe it or not, is the Global hub for social impact investing; including the world’s first tax relief for social investment, whilst also placing it on the G8 agenda. Current limitations acknowledge that these investments can’t always be scaled to create attractive returns, whilst carrying overall higher risks, but it nevertheless is a fast-changing landscape, with forecasted growth some $300 billion by 2020.
Investing in a changing landscape
Significant industry changes undoubtedly coincide with critique. The nature and purpose of investment is to gain returns on the invested sum, in order to develop long-term financial performance. A current limitation of ESG is the relative inconsistency in data collection, analysis, and reporting, which dilutes the overall ratings of company sustainability. Despite the aforementioned growing number of bodies/councils to address this, the argument that ESG investing yields better risk-adjusted performance remains somewhat untenable without consistent standards.
Nevertheless, there is an undeniable shift in the investment world which will begin to observe ESG formats shifting into core offerings, rather than peripheral, well-to-do holdings. Widening wealth gaps, corporate tax/labour exploitation, and the undeniable issue of climate change are just a few of the catalysts for this change; as these regulatory, environmental, demographic, and technological trends rapidly evolve, the global investment world can be leaders of a positive, sustainable development to improve the world we live for us and our future generations.