“The capital flow from carbon-intensive to carbon-neutral investments is perhaps the most dramatic and predictable economic shift in human history.” Janet L. Yellen, Secretary of the Treasury.
Companies of all sizes are including ESG considerations in their strategic decisions. This is nothing new for some, but each challenges new measurement and accountability requirements. These include determining the impact of these considerations while ensuring that previously ignored issues are included.
Many drivers are behind this development.consumer prefer Brand with purpose, 7 out of 10 employees I want Regulators are expanding long-standing governance requirements to require reports on social and environmental issues. Groups of companies with shared interests have come together to issue statements on voluntary ESG and impact agreements. where to allocate the funds.
Stakeholders are increasingly using metrics for decision making. Investors and financial professionals regularly use statistics, indicators, and other economic data to generate risk profiles that can predict the future health of companies with relative accuracy.
But can we create an ESG metric to foresee the risks of downplaying action to prevent climate change? Can we create a metric that shows the costs of not advocating for social justice for businesses? Can rigorous non-financial standards be developed that are of the same quality as existing accounting standards? Can companies assess climate-related risks with an acceptable degree of certainty?
There are many third parties that provide ESG ratings and rankings based on their own methodologies that address these questions. As a result, thousands of his ESG scores are confusing and difficult for investors to truly understand their meaning. ESG evaluation standardization: It is slowly arriving, spurred by government initiatives rather than market forces. Regardless of the driving force, the key to acceptance of these scoring systems is the degree of methodological transparency. Increased standardization will increase the usefulness of these ESG metrics in corporate decision-making.
Despite these valuation limitations, impact investing has proven to attract asset owners keen to “do good” while still making a profit. The growth of ESG-based investment funds continues unabated, projected It will soon represent 21.5% of all global assets under management. These ESG funds have at least matched, and sometimes exceeded, the financial performance of their non-ESG-based investments.
For this investment trend to continue, purposeful funds need to continue to offer the same financial returns as other types of investments. This increases the attractiveness of his ESG-based investments to the investment market as a whole, while also having a constructive impact on his ESG concerns. Funds that do not have comparable returns to other types of investment will not survive unless they can prove through widely accepted ESG metrics that they are worthy of having a positive impact on these important environmental and social issues. The current challenge for asset managers, regulators, rating providers, and others across this ESG ecosystem is to develop metrics that can effectively predict and demonstrate company performance on topics that stakeholders deem important.