GOVERNANCE
WHY ARE INVESTORS FIXATED ON SUSTAINABILITY?
ESG MOVES INTO MAINSTREAM INVESTING
A GLOBAL VIEW
By Paul Davies and Michael Green
Recent studies show ESG implementation in mainstream finance has improved significantly, presenting opportunities for sustainable, long-term returns. In recent years, Environmental, Social and Governance (ESG) implementation has transformed from a niche to mainstream activity, as asset managers, asset owners, and pension funds increasingly recognize the importance of ESG factors to investors, stakeholders, and shareholders. Issues such as climate change, remuneration, modern slavery, and equal pay have led to the integration of ESG into investment processes. INCORPORATING ESG FACTORS AND METRICS
ESG factors include:
ESG metrics can be used
ENVIRONMENTAL FACTORS Climate change Resource depletion Waste and pollution Deforestation
analysis, into investment and decisionmaking processes to better manage risk and
to ESG risks. Environmental metrics may
land, disposal of hazardous
SOCIAL FACTORS
waste, or reduction of toxic emissions.
Working conditions Local communities Health and safety Employee relations Diversity
Social metrics may examine a company’s business relationships (e.g., if the company works with suppliers that hold similar values) and working conditions (e.g., if the company shows a high regard for workers’ health and safety). Governance metrics may examine how the company is run (e.g., if the company uses accurate and
GOVERNANCE FACTORS Executive pay Bribery and corruption Political contributions and lobbying
ESG factors and metrics are numerous
Board diversity and structure
financial metrics.
with regard
ownership of contaminated
generate sustainable, long-term returns.
but external to the traditional canon of
performance
company manages
(PRI) describe “responsible investing” as which are not traditionally part of financial
a company’s
examine how a
The Principles of Responsible Investment an approach to integrating ESG factors,
to evaluate
Taxation
transparent accounting methods, eschews illegal practices, and avoids conflicts of interest in board member selection). MONITORING THE TRENDS THAT ARE SHAPING ESG
Several major events and trends have influenced ESG’s shift toward the mainstream in recent years. First, the 2008 financial crisis underlined how important