By David Atkin, CEO, Principles for Responsible Investment
Critiques of environmental, social, and governance (ESG) considerations in investing have increased significantly over recent months.
This attention and pushback are, if anything, a symptom of how much traction responsible investment has gained, but this has understandably also raised questions among investors. While ESG incorporation is not new, many are new to it.
Some investors may be wondering whether to continue embracing ESG incorporation when it is receiving so much scrutiny. So should they? The answer is, without question, yes.
ESG incorporation is evidence of markets working and the consideration of ESG factors must therefore be a fundamental part of investing. It is about considering information that can be material to the value of investments – and ESG investing practices are largely driven by investor needs.
As such, ESG factors are not separate from fundamental investment analysis; they represent a natural evolution in the data that is available to (and considered by) investors in their decision making.
Whether using them to assess how companies are responding to racial equity issues or implementing goals to reduce carbon emissions, ESG factors provide insights into how companies consider and respond to issues that can impact their short and long-term success.
Increasingly, investors understand that their duty to fulfil their obligations to clients can be impacted in fundamental and lasting ways by ESG trends – and the sustainability outcomes that result from them.
Using ESG information to align portfolios with those trends can be good for gaining business today and protecting portfolios and clients in future. In this way, ESG factors provide information that investors need to achieve their investment goals and fulfil their fiduciary duties.
In this context, it’s interesting to note that US Secretary of the Treasury Janet Yellen recently said: “The flow of capital from carbon-intensive to carbon-neutral investments is probably the most dramatic and predictable economic shift in human history. The transition is happening already.”
With such a profound shift in investment flows in the making, it’s hard to argue that it won’t come with benefits – in terms of investor returns, and in making a contribution to sustainable outcomes by mitigating climate change.
Our role at the Principles for Responsible Investment is to support investors around the world in their efforts to better access and incorporate ESG information in investment decision making. We provide best practice guidance, enable collaboration between signatories, and engage with regulators to highlight the consideration of potentially material ESG information.
ESG integration is an evolving practice, and investors, governments and regulators are at different stages of that evolution. Encouragingly, our regulation database shows that regulators globally are setting standards to improve the integrity and efficient functioning of markets on ESG incorporation. To push investors to ignore ESG information – through rhetoric or policy – would mean neglecting data that can impact the risk and returns of an investment.
This doesn’t just risk missing important information, it could be a violation of fiduciary duties. The PRI’s Legal Framework for Impact project explores this in more detail.
Around the world, there is immense work being done to better develop and align ESG practices for lasting effect. Adoption of the recommendations by the Task Force on Climate-Related Financial Disclosures continues to grow, and last tallied at over 2,600 organisations.
The International Financial Reporting Standards Foundation, whose accounting standards have been adopted by 140 countries, is working on a baseline set of climate-related ESG disclosures.
The European Union and US Securities and Exchange Commission have proposed similar requirements to begin setting a baseline of what environmental information means for investors.
The PRI is also supporting regulator efforts to reduce greenwashing and ensure savers and investors are getting the services advertised by their investment managers and asset owners.
There’s more work to be done to establish how ESG incorporation can be better adopted across financial markets, and the focus should be on delivering transparent, actionable information for investors and beneficiaries.
The PRI has more than 5,000 signatories with c.US$120 trillion in assets, and these investors have made it clear that they consider ESG factors because of their materiality to the value of investments.
To ensure better decision making by investors, open discourse on how ESG incorporation will evolve in a rapidly changing market should be welcome.
But for this to be productive, we need to focus on how appropriate approaches deliver vital transparency and enable markets to work to improve investment outcomes.
It’s clear that we must continue to support investors in gathering, considering, and using ESG information to achieve investment goals and secure beneficiaries’ investments for the long term.
Investors have a powerful role to play – and ESG incorporation is a key tool to help them fulfill it.
This blog is written by PRI staff members and guest contributors. Our goal is to contribute to the broader debate around topical issues and to help showcase some of our research and other work that we undertake in support of our signatories. Please note that although you can expect to find some posts here that broadly accord with the PRI’s official views, the blog authors write in their individual capacity and there is no “house view”. Nor do the views and opinions expressed on this blog constitute financial or other professional advice.If you have any questions, please contact us at [email protected].