Evolution of ESG investing — the new normal

Published on March 29, 2022 by Kriti Dawer

The journey so far

The global sustainability movement was gaining momentum even before the pandemic, which further enhanced the value of environmental, social and governance (ESG) factors in sustainable investing. Sustainable investing assets in five major global markets grew at a CAGR of 7.3% to USD35.3tn at the start of 2020, surpassing the CAGR of 3.5% for professionally managed assets over the past two years, according to a Global Sustainable Investment Alliance (GSIA) report of 2020.

As the financial world took initiatives to implement these concepts in investing, ESG ratings emerged. The 2020 trends report of the Forum for Sustainable and Responsible Investment estimates that 33% of all US assets under professional management are tied to sustainable investing or are related to ESG practices.

ESG investing has evolved in recent years to meet the demands of institutional and retail investors, as well as those of certain public-sector authorities that wish to better incorporate long-term financial risks and opportunities in their investment decision-making processes to generate long-term value. J.P. Morgan polled investors from 50 global institutions, representing a total of USD12.9tn in assets under management (AuM) to assess how they expect the pandemic to impact the future of ESG investing.

Let’s dig deeper into the major challenges facing ESG investing, steps taken to overcome them and what the future likely holds.

Challenges involved

News relating to ESG metrics has been encouraging in recent years, but the reality is different, as current ESG practices are exposed to material information that is accessible and utilised by investors in an effective manner. For all its potential prospects, ESG considerations pose challenges on integration into existing risk management frameworks:

  • Strategy and framework: Firms have ESG-related aspects in their current risk frameworks, but gaps and opportunities would need to be identified if management is to be improved. ESG factors would need to be integrated into risk management frameworks across risk types, and risk appetite would need to be defined. Additionally, management would need to understand how ESG considerations could impact existing products and services or necessitate the launch of new offerings

Steps taken to overcome challenges

Much needs to be fixed and many processes accelerated, to which end the following ESG regulations have been adopted in recent years:

  • UN Agenda 2030: Includes 17 Sustainable Development Goals (SDGs) to spur responsible, sustainable growth within the private and public sectors

Looking ahead

All these regulations may ensure strict scrutiny of unsustainable sectors, and companies will need to respond if they hope to survive in the long run. It is forecast that by 2025, approximately 33% of all global AuM (not just domestic) will have ESG mandates. The sector is expected to grow 433% from 2018 to 2036, resulting in total global assets of USD160tn. As a result of the Paris Agreement adopted in 2015, the International Finance Corporation anticipates nearly USD23tn in investment opportunities in emerging markets between now and 2030. From a broader perspective, ESG regulation will be the next wave to comply with, benefiting stakeholders and boosting investment in the long term. A sector transformation is expected as stakeholders and regulatory priorities continue to evolve, making it essential that all decision makers stay informed.

How Acuity Knowledge Partners can help

We offer comprehensive thought leadership and specialised ESG research solutions. We also enable investment banks and advisory firms to establish and grow their sustainable finance practices by providing a wide range of customised analysis and support.

About the Author

Kriti has done graduation in B.Com(H) from University of Delhi and currently, a CFA L-1 candidate. She has over 2 years of experience. She is a member of Private Equity and Consulting in Acuity and prior to that, worked as a credit & research analyst.

Originally published at https://www.acuitykp.com.

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Acuity Knowledge Partners

We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points. https://www.acuitykp.com/