Informed, sustainable and socially responsible. These three factors are at the heart of the latest approach to investment, known as Environmental, Social and Governance (ESG).
According to the 2016 report from the Global Sustainable Investment Alliance, ESG investments are worth a total of $22,890 billion, with Europe the most virtuous continent in the world. But what exactly are they?
Focus on society and the environment
The three words that make up the ESG acronym all focus on different social issues. The first is the environment, with an onus on risks such as climate change, CO2 emissions, air and water pollution, waste and deforestation. The second refers to human rights, gender policies, relations with civil society and working standards. And the third and final theme focuses on governance policies, including control procedures, managerial salaries, the composition of boards of directors, the conduct of the most senior members of organisations and of businesses as a whole, in both legal and ethical terms.
It’s not all that easy to sum up ESG in a nutshell, however. The first attempt to define this concept was the UN’s six Principles for Responsible Investment (PRI), announced in 2006 and voluntarily accepted by nearly 1400 signatories, including institutional investors, wealth management companies and service suppliers. Together, the signatories – who were responsible for $59,000 billion in assets as of 2015 – had made an attempt to favour the diffusion of sustainable, responsible investment among institutional investors.
In agreeing to back the PRIs, signatories promised to adhere to and implement the following principles:
1. To incorporate ESG issues into investment analysis and decision-making processes;
2. To be active owners and incorporate ESG issues into our ownership policies and practices;
3. To seek appropriate disclosure on ESG issues by the entities in which we invest;
4. To promote acceptance and implementation of the Principles within the investment industry;
5. To work together to enhance our effectiveness in implementing the Principles;
6. To report on our activities and progress towards implementing the Principles.
Performance and numbers
In the last 24 months, ESG investments have grown exponentially. While shares and equity funds are still the preferred solution among investors, investments using green bonds have grown constantly since the first quarter of 2017. Issuance of such bonds is up by 40% on 2016. If you analyse equity and bond investment as a whole, global green investment has increased by 25% in the last two years, according to data from the Italian Sustainable and Responsible Investment Week (SRI Week).
A report by the McKinsey consultancy firm named From “why” to “why not”: Sustainable investing as the new normal shows that the presence of ESG in investment analysis is growing by 17% per year, with that rate increasing all the time. ESG investments now represent 26% of global investments, the equivalent of $22,890 billion in Assets Under Management (AUMs), according to the most recent data for 2016. This success is down in large part to the high performance of such investments.
Encouraging signs from Europe
In May, the European Commission made a proposal designed to further promote investment in sustainable, green activities by introducing new obligations for financial services companies. The measures proposed aim to create a taxonomy of criteria determining which criteria can be categorised as green. They will also give institutional investors – i.e. asset managers, insurance companies, pension funds and financial consultants – greater clarity on how to integrate ESG objectives into their decision-making processes. After all, it will be up to these figures to show that their investments are in line with the objectives. Last but not least, they will be obliged to offer sustainable investment options to retail investors too. “We must invest our money in projects that are compatible with our objectives around decarbonisation and the fight against climate change,” explains European Commission vice president Valdis Dombrovskis. “It’s important for the environment, the economy and financial stability. Between 2007 and 2016, losses deriving from environmental disasters increased by 86%.”