In this story:
Nearly all (95%) of respondents from a recent study say they plan to engage with companies they invest in about issues related to the Sustainable Development Goals (SDGs), according to an S&P Global report. Investors say their assessment of a company’s environmental, social and governance (ESG) profiles have evolved from a simple measure of corporate responsibility to a key driver of an investor’s decision-making. So the standardization of an ESG framework – which the market currently lacks – is a critical part of an increasingly values-based economy, the report finds.
What exactly does this mean? Publicly traded companies that want to court investor interest may find it useful to begin disclosing – in greater detail – their ESG-related risks and the potential rewards they face. As each challenge is overcome, and each reward achieved, “a sustainable, more inclusive, less volatile global economy will become more of a reality,” the report finds.
This topic – investor interest in the ESG practices of the companies they evaluate – has risen to the forefront in recent months. In fact, two reports released last month focused on the topic, with similar findings: companies that don’t address risk in their environmental reporting may be missing out on an opportunity to build investor trust and ensure long-term profitability. Companies that acknowledge risks and analyze how those risks might affect their value may be more likely to catch the eye of investors, according to a report from Ceres.
One long-term investor said in the Ceres report that it is important to engage with companies about risk: they must consider the value they stand to lose when, for example, they face a depleting water supply but lack an effective water use management plan and policy.
The report, A Standard ESG Framework Is Key to Unleashing Markets’ Responsible Growth, also found that the role of intangible factors like reputation and ESG has dramatically increased when investors consider the perceived value of companies.
Still, those companies that are trying to attract investors by including risk reporting need to be confident in an investor’s ability to accurately price these long-term risks and opportunities. Investors must learn to speak the same ESG language as companies so both parties know they are on the same page in terms of ESG risks and results.
An important element in helping the two sides understand each other’s language could be the development of a “lingua franca” – common terminology and standards for identifying sector-specific ESG factors and measuring the capital differential of more sustainable enterprises. Developing accepted principles and KPIs regarding transparency, governance, and environmental impact would be an important enabler for higher levels of investment in areas such as clean energy and other sustainable infrastructure.
Investors aren’t just telling the companies developing these results that they’re interested in ESG investing. The data is clear:
- $22.9 trillion of investments under management globally are broadly oriented toward ESG policies.
- $8.7 trillion of investments under management in the US are broadly oriented toward ESG policies.
- PIMCO, the world’s biggest bond fund, has developed a “sustainability initiative” to support ESG-focused investment solutions.
- Other large investors, such as UBS and BNP Paribas, have undertaken similar efforts.
- The Portfolio Decarbonization Coalition, a United Nations-sponsored group of 27 mostly European institutional investors and asset managers controlling $3.2 trillion in assets, has committed $600 billion to fund green projects and investments.