Climate Change, Paris Accords Driving ESG Strategies: Report

A new report from Newsweek Media Group’s Vantage Thought Leadership division says environmental, social and governance investing has gone mainstream, having gotten a boost from the Paris Climate Accord and adoption of the UN Sustainable Development Goals in 2015.

At the same time, it says, a significant gap exists between investors’ good intentions and action.

The report was based on findings from a survey of 281 asset owners and managers from across the world, 37% of which were based in the Americas, as well as a dozen in-depth interviews with leading investors and practitioners in ESG investing.

The survey found that climate change was the chief driver of ESG strategies, with 65% of respondents listing this as their top priority and a further 50% expecting to have divested from fossil fuels by 2030 — the UN’s target date for meeting sustainable development goals.

Three in five investors also had a specific policy on meeting the UN SDGs.

Still, many investors said they were faced with a lack of relevant investment information as well as a scarcity of ESG investment vehicles. As a result, they struggle to adopt ESG across their portfolios — just one-quarter of all assets globally are currently managed under ESG strategies, according to the report.

For sustainable investing to become the norm, the report argues, corporate reporting and standards must be improved, including, where appropriate, via regulation. “Otherwise, there is a risk that the current push to give investments the ESG label turns it into a box-ticking exercise.”

In addition, mindsets need to change. According to the report, sustainable investing is often thought of as producing low yield, yet data on investment performance show that ESG investment strategies can deliver both higher returns and a reduction in volatility.

To grasp the opportunity, it says, investment professionals need better education and incentives. In interviews, investors also agreed on a need to create awareness among the general public, which has the power to demand more from those that manage their investments.

“The results of the research challenge long held assumptions and prejudices about the use of ESG data in making investment decisions,” the report’s author Harry Hummels, who holds a chair in ethics, organizations and society at Maastricht University, said in a statement.

“Yes, there is work to be done to accelerate change, but we are witnessing a trend which is clearly positive, inspiring and hopeful.”

Onward to 2030

The report says research suggests that ESG investment leaders are raising the stakes, convinced that ESG investing not only makes business sense, but is also increasingly becoming a business imperative.

Investors in the survey said they expected to see at least four trends developing in the years ahead:

• Greater integration. Investors are adopting ESG across the entire portfolio, from ESG-focused funds to products such as green bonds and impact investing
• Greater engagement. Asset managers plan to work more closely with shareholders, such as in filing/co-filing resolutions, and with corporate leaders to accelerate action
• More reporting. The drive for greater transparency and accountability means investors expect greater demand not just to report on their actions, but also on impact and outcomes
• More divestments. Nuclear weapons, tobacco and coal especially have targets on their backs.