Raising awareness to environmental, social, and governance (ESG) issues and targeting goals beyond maximizing profits and minimizing risks is a growing trend around the world, also within investing, which has generated
in recent years. Applying
process is a response to global challenges such as climate change and inequalities, with the aim to have a positive impact on society - although environmental factors are the main focus for most ESG investments. It is more and more becoming the standard in the investment industry, especially in Europe, where
. The most common approach to investing sustainably is through ESG integration - by explicitly and systematically factoring ESG issues into the investment decision. This approach is creating impact by forcing companies to report how they are dealing with important environmental, social, and governance topics.
What is driving the growth of ESG investments?
The growth of sustainable investments is driven by several factors: from the
politicization of ESG, impact on risk and return, from
investor demand, to influence corporate behavior, and keeping a good brand and reputation, just to name a few. Although some investors still believe that it might have a negative impact on risk and return, meaning they believe that the ESG portfolios will underperform compared to non-ESG portfolios, and they do not want to sacrifice investment performance. This unwillingness to accept lower return or increasing risk used to be the main barrier to wider adoption of ESG investing, but it is, however, becoming more acknowledged around the world that investments in
sustainable securities such as funds can perform even better, or at least as well as non-ESG portfolios, and can help mitigate risk. The main reason keeping investors and
firms from engaging with ESG today is due to factors, such as lack of knowledge, lack of comparability of ESG data across issuers, or regulatory or legal constraints.
How is ESG performance measured?
ESG impact is still hard to measure, despite
around one third of invested assets being defined as sustainable, and despite the growing awareness to the topic. There are several score systems in use to measure the risks and effects of investments, such as the most widely used Sustainalytics, MSCI ESG ratings, and S&P Global (RobecoSAM), but there are also other third-party ratings or awards. These scores, or ratings, are the most common tools used by both institutional investors and fund selectors to help measuring the impact. They do, however, show significant divergence in many cases, even when being standardized and
measuring the impact of one and the same company. There are also
several different sustainability reporting frameworks to help enterprises communicate their impacts, although there are large differences between stock exchanges in which of these frameworks are being referenced. This divergence in ESG reporting prove that measuring ESG impact is hard, but not impossible, and many investors are calling for a more standardized reporting framework and regulation around the topic.
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