Key trends shaping ESG – PBA Pro Bono AustraliaKey trends shaping ESG – PBA Pro Bono AustraliaKey trends shaping ESG – PBA Pro Bono Australia
Impact Investing Forum 2023
London. Dec 05-06, 2023.
Dr Kaushik Sridhar outlines the key trends that he sees influencing ESG data and ratings in the future, looking back at 2020.
ESG is a complex beast. It can mean different things to different people.
Many asset owners are constrained by a confusing array of unreliable, opaque, and incompatible measurement frameworks despite growing interest in impact investing.
Portfolio managers who are interested in ESG should consider all factors when deciding on the future value of an investment. While that is perfectly legal, it’s not the best way to do the job. ESG risks are something that most investors consider when assessing the impact on their future, their country, and their family. They see it through a wider lens.
In 2015, the UN General Assembly met to discuss a blueprint for sustainable peace and prosperity for people, and the planet. This plan is based on the adoption of 17 sustainable development goals (SDGs), which call for action by the public and private sector to end poverty and combat climate change.
How can we create a world with zero hunger, good health and economic growth? According to the United Nations Development Programme, $6 trillion in annual investment is needed to reach the SDGs. This sum is equivalent to the combined GDP of France and the UK, but it’s still a small amount compared to the $88.5 trillion global assets under management.
OnePoll’s recent survey found that 62% of us would choose to invest our pensions and other savings in investments that have a positive impact on society and the environment. 86% of millennials say sustainability is a priority in their investments.
Looking back at 2020, I see these key trends shaping ESG data ratings and ratings:
One of the most talked about facts is the rate at which the S&P 500, the US benchmark for large-cap US stocks, reports on sustainability. In 2020, 90% of index constituents published sustainability reports, a dramatic increase from 20% in 2011.
Sustainability reporting will be more common in equity benchmarks. A sustainability report is a standard practice within the S&P 500. Increasing use of common frameworks such as SASB, TCFD and others will ensure that these reports are of high quality and provide assurance. For true growth in corporate disclosure, look to private companies and mid- and small-cap companies. Companies that are not large-cap equity benchmarks will see formalised ESG reporting expand quickly.
In 2010, there were a few voluntary frameworks that guided companies in reporting ESG data. This data was then gathered and analyzed by investors and specialised data service providers. There is a wealth of detailed guidance and tools available for corporate reporters and other market participants in 2020.
Regulations that require more detailed disclosure of ESG information from corporations will continue to grow. ESG standard setting outside of government agencies is becoming more precise and aligned. These forms of regulation, both soft and hard, were previously optional and vaguely phrased. However, they are now more formal and required.
ESG for investors
Morningstar found a 4x increase of ESG assets between 2018 and 2019, from $5.5 billion up to $20.6 billion. Participation in UN Principles for Responsible Investment has also risen, with 700+ signatories having $21 trillion AUM by 2010, to 3000+ signatories having over $100 trillion AUM by 2020. ESG investing is now a mainstream part of asset management.
ESG investing has evolved from niche equity products into an integrated approach in all segments of capital markets. ESG investor interest that is wider will increase ESG data volume and drive quality improvements ahead regulatory trends.
Does this mean that ESG data can be as standardised as traditional corporate accounting in the near future? It doesn’t. The ESG ratings that are commercially accessible will continue to have significant differences, which will cause consternation among many. Those who are able to see beyond this may find opportunities in the significant expansion of ESG data’s detail, volume and overall quality.
Companies used to have only vague guidance. Now they have more information and tools to guide them in their technical and strategic work on ESG management. Investors who are able to look beyond the ratings and assess the wider range of ESG information can improve their investment analysis and compete in a more competitive marketplace by smart ESG integration.
Finally, regulators and others interested in understanding important ESG trends will have more data to support their research and actions.
Market-led efforts as well as regulatory mechanisms will continue to push for consistency, which will drive standardization in ESG data slowly but surely. The most important trend in ESG ratings is not alignment but democratisation.
ESG ratings, which were once only available through expensive subscriptions, are now available for everyone who wants them. ESG capacity is being built by investment firms and they will be able to develop internal ratings. ESG data firms will soon need to adapt their business models.
I expect that a few issues, including climate, diversity, and impact metrics, will develop quickly in 2021. COVID responses may also transform corporate risk disclosure. I wouldn’t be surprised to see transformation in the nascent datasets on biodiversity, water, diversity, human rights, or any other areas. These trends may make a year seem like a decade due to their convergence.
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