What is ESG and ESG investing?

The acronym ESG refers to a broad range of environmental, social and governance criteria on which companies are measured. It reflects the growing sensitivity of consumers to how companies operate as factors in their buying decisions. And it is of increasing interest to investors who are concerned about companies adopting practices that will mitigate risk and ensure their long-term sustainability. As a result, ESG issues are increasingly shaping the way companies do business around the globe.

Since the term was first popularized in 2005, investors have increasingly seen value in the idea of using ESG factors to guide investment decisions. The idea of ESG investing is an evolution of the trend toward socially responsible investing, but ESG provides a broader framework for looking at social impact beyond simply excluding companies associated with negative outcomes.

What factors does ESG reflect?

The factors used to measure ESG performance can vary, but typically include things such as:

  • Environment: Greenhouse gas emissions, waste and pollution, water use, land use
  • Social: Workforce and diversity, safety management, engagement with communities
  • Governance: Governance structure and oversight such as board composition, code and values, transparency and reporting, cyber risk

How large is the trend towards ESG investment?

Having previously been something of a niche area, the use of ESG factors to steer investment decisions is now becoming much more widely accepted.

According to a report released by the Global Sustainable Investment Alliance on April 1, the level of global sustainable investments reached a new peak of $31 trillion at the beginning of 2018, a 34% increase from 2016.

Across five major regions analyzed by the report, Europe and the U.S. remained the largest markets for sustainable investments in 2018, with $14 trillion and $12 trillion in assets under management, respectively. The third-largest and fastest-growing region was Japan, which saw growth of more than 300% to reach $2 trillion in AUM.

The U.N. Principles for Responsible Investment, a set of principles for incorporating ESG issues into investment practice, has been signed by 345 large asset owners. Meanwhile, Amundi, Europe’s biggest asset manager, has pledged to fully screen for ESG in 100% of its investments by 2021.

Is this just a blip, or is the trend expected to continue?

The trend will persist, as investors across a wide range of asset classes now show a growing interest in ESG, predicts Libby Bernick, Global Head of Corporate Business at Trucost, the S&P Global Market Intelligence unit that assesses risks relating to climate change, natural resource constraints and broader ESG factors.

“Social and human capital issues are also on the rise, as diversity, data privacy, and the treatment of labor in supply chains are being looked at with a closer lens. It is clear that company disclosure on ESG issues will be very important now that 49 stock exchanges have committed to publish ESG disclosure guidelines,” she writes.

“Companies in the U.S., where there are no mandatory disclosure requirements, will be in the curious condition of competing for capital with companies located in emerging economies that have better ESG disclosure.”

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