ESG Moves from Margins to Mainstream

The US-based GreenBiz’s first-ever GreenFin Summit held recently brought together about 100 sustainability and investment professionals. They were there to discuss what it would take to align corporate reporting with investor needs in order to accelerate investments in sustainable and low-carbon solutions.

The writing on the wall was clear – misalignment between what companies are reporting and what investors actually need to make risk-based asset-allocation decisions.

A GreenBiz post summit release noted that it was clearly evident that corporate reporting on environmental, social and governance, or ESG, issues has moved from the margins to the mainstream. It now sits squarely on Wall Street, where it is being factored into a growing number of investment managers’ portfolios.

“Indeed, ESG data is getting a lot of attention,” the post said. “Last fall, a sizable group of institutional investors and asset managers, state treasurers and ESG advocates petitioned the U.S. Securities and Exchange Commission to mandate standardized disclosure of ESG information by publicly traded companies.”

Also, credit raters have been exploring ways to incorporate ESG factors into their ratings. S&P Global Ratings, Moody’s Investor Service and Fitch Ratings, among other credit rating agencies, have signed onto the United Nations-led Principles for Responsible Investment’s ESG In Credit Ratings Initiative, which aims to standardize ESG issues in fixed-income markets.

The European Commission has also proposed regulations asking institutional investors and money managers to demonstrate how their investments align with ESG factors.

“All of this is a radical change from just a couple years ago, when corporate sustainability executives lamented that mainstream investors simply didn’t care about ESG issues and rarely brought them up in investor meetings or quarterly earnings calls. Today, a growing number of investors equate high ESG ratings with well-run, lower-risk companies, and studies show that ESG leadership can better mitigate downside risks, capture investor interest and create long-term value,” the post observed.

However, there are problems that need to be addressed.

• In the absence of a clear understanding of ESG topics by corporate boards. Some of that stems from the lack of standards and definitions, and from the failure to translate sustainability issues into the language of finance: risks, costs, competitive advantage and the like.
• Time lags are yet another issue: While financial reporting is fairly current, sustainability metrics are often a year or two old before being disclosed, creating limited value for investors.

“All of which suggests that there’s a long road ahead before companies and investors can speak the same language on ESG issues and do so in a way that’s “decision-useful,” as investors call it, meaning comparable, standardized data on increasingly significant ESG risks and opportunities. Even when that alignment comes, it may take a while before such data allows for the longitudinal back testing that investors frequently use to assess investment theses with a basket of stocks.”

This summit is an interesting opportunity for Indian investment community and investors to observe and learn. This can help India leap-frog from its nascent stage of ESG investment ecosystem to a more mature one sooner than they hope it would.