What Is ESG Investing?

ESG stands for Environmental, Social, and Governance as it refers to these to provide a
framework are core principles for investors seeking to invest in companies that are
considered, social, ethical and environment friendly in creating solutions to the challenges we
face in today’s world.

Why is ESG Investing important?

Fuelled by growing consumer interest and demand, businesses will publish more information
about their corporate responsibility and ESG initiatives. This represent a significant opportunities
for ESG investors as there is a growing demand for solutions that have the potential to lead to
positive change, as we look to rebuild our economies and communities on stronger foundations.
According to CFA Institute research, a third of Asia-Pacific (APAC) investors and half of
Europe, Middle East, and Africa (EMEA) and Americas investors looking for their investment
firm to incorporate climate change.

We see a lot of Investors are increasingly applying these non-financial factors as part of their
analysis process to identify material risks and growth opportunities. BlackRock Inc. along with
the other world’s largest asset manager are taking a proactive stance on issues across the ESG
spectrum around disclosure and data quality that affect biodiversity and the natural environment.
This goes not without saying as there is evidence to suggest that good ESG investments
have outperformed the broader markets according to MSCI.
How will ESG be taken into account?

It is challenging to classify an ESG issue as these factors can often be measured (e.g., what the
employee turnover for a company is), but it can be difficult to assign them a monetary value
(e.g., what the cost of employee turnover for a company is) as ESG metrics are not commonly
part of mandatory financial reporting. Below are some of ESG factors that can be identified.

ESG research and ratings from specialist data providers are currently a key part of the ESG
ecosystem, and we expect this position to strengthen further in the next 5–10 years as there are
data needs. 78% of practitioner survey respondents from CFA want at least one type of climate
information. 
Where does ESG get challenging?

As of now, numerous institutions are working to form standards and define materiality to
facilitate incorporation of these factors into the investment process to combat climate change and
to make sustainable & responsible investment, as well as pressuring companies to address racial
and gender diversity. However, ESG data usage varies by context, and the range of standards
may enable a degree of bespoke reporting that is helpful for firms.

About 90% of companies in the S&P 500® publish sustainability reports, but only 16% have any
reference to ESG factors in their filings, creating a mismatch between what is disclosed in regulatory
filings and what companies voluntarily publish. The consistency and comparability of ESG data
from companies is poor. There are very limited national requirements for companies to report on
most ESG data, with companies left to determine for themselves which ESG factors are material
to their business performance and what information to disclose to investors.

The challenges of data in sustainable investing have allowed growth in the practice of
“greenwashing.”Greenwashing means conveying a false impression or providing misleading
information or a misleading narrative about how a company and its products are environmentally
sound or positive in an ESG context. In response to demand and regulatory drivers, the quality and
quantity of ESG data will continue improving as regulators across jurisdictions are facing pressure to
address this gap. 
Who: Example of “Greenwashing”

Chevron is the 2nd most polluting company in the world, yet is attempting to appeal to climate-
conscious consumers through a number of claims demonstrated in the complaint to be false and
misleading. Earthworks, Global Witness, and Greenpeace USA are jointly accusing Chevron
Corp. of producing "deceptive advertisements which overstate investment in renewable energy
and its commitment to reducing fossil fuel pollution."

When: ESG will be very important in 2021

As ESG investing accelerates in demand, several key trends are emerging – from climate change
to social unrest. The coronavirus pandemic, in particular, has intensified discussions about the
interconnectedness of sustainability and the financial system. Here are few things to note:

 As ESG investing grows, trends for 2021 are emerging. Morningstar reported a 77%
increase yoy in investing into ESG funds in Europe in 2020. Furthermore in 2021, new
labels and standards will catalyze the emergence of various sustainable asset classes. 
 The next few decades will see the largest generational wealth transfer in history: an
estimated USD 30 trillion from baby boomers to millennials. This will mark an important
milestone for ESG investing as result shown Millennials filtered with more sense of
responsibility to concentrate on value-based investments.

1. Climate change continues to rise as a key issue as a threat to nature & biodiversity

As many countries and supervisory authorities in the financial system begin to require climate risk
disclosures, we expect continued drive towards transparency around climate in the lead up to the
United Nations Climate Change Conference summit, or COP26, taking place in November 2021.

This is a landmark event in which governments are expected to submit ambitious emissions-
reduction targets six years after the signing of the Paris Agreement in 2015. This legally binding
treaty on climate change aims to limit global warming to two degrees Celsius. Over the last five
years, many positive steps have been taken around the world. But to meet agreed targets, this
will need to rapidly increase in the coming years.

According to an S&P Global Trucost analysis of 3,500 companies representing 85% global market
cap, less than one percent of business models align with Sustainable Development Goals 14 and 15,
“life below water,” and “life on land.” We expect this to change in 2021 with businesses, including
investors, shifting focus on growing threats to nature and biodiversity. The World Economic Forum
estimates that $44 trillion of economic value generation representing more than half of world GDP
is moderately or highly dependent on natural resources from food to ingredients for medicine.

2. The new Biden administration will reinvigorate ESG policies and climate urgency in the U.S.

U.S. set target to net-zero greenhouse gas emissions by 2050 with an interim target of decarbonizing
the U.S. power sector by 2035. These moves come alongside stark evidence of the economic costs
of climate change. According to S&P Global Trucost, almost 60% of the companies in the S&P 500
have at least one asset at high risk of physical climate change impacts. In 2020 alone, the U.S. broke
an unsettling record, experiencing 22 extreme weather and climate change-linked disasters that each
cost in excess of $1 billion. Prior to 2020, the largest number of annual major disasters was 16.
3. The nature of transition conversations will shift from climate mitigation to climate resilience.

After a record year for sustainability-related debt issuance, demand for sustainable and green bonds
is set to "go through the roof" in 2021. With the increase in companies and governments making
net-zero commitments, transition bonds are emerging as a potential solution by enabling carbon-
intensive companies to raise capital and use the proceeds for activities that help them reduce their
carbon footprint.

4. Investors will continue pressing companies on social issues, particularly around COVID-19, worker
safety, and diversity.

Conversations about disclosure are not limited to the ‘E’ in ESG. On the contrary, when the
pandemic hit it brought widespread social unrest around income inequality and worker safety.

First, opportunities within health firms. The pandemic highlighted the innovations and
opportunities of those operating in the health sector, from those behind groundbreaking research
to firms that are part of supply chains. The health crisis has been a part of ESG criteria for many
firms before the pandemic but this has largely focused on an ageing population. The pandemic
has helped bring the work the sector does, and the opportunities it brings, to the forefront.
Second, often when we talk about diversity, we talk about gender— a data point that is frequently
easier to measure than other kinds of diversity. There is evidence that gender diversity improves
results. S&P Global Market Research team looked at companies from 2002-2019, and found that
those with female CFOs generated $1.8 trillion more in gross profit than their sector average.
Companies with female CFOs also experienced bigger stock price returns relative to firms with
male CFOs during the executives' first 24 months in the role. In December 2020, Nasdaq proposed a
rule that that will require most of its more than 2,500 listed companies to have at least one director
in the coming years who identifies as a woman and another who is Black, Hispanic, Native
American, LGBTQ+ or part of another underrepresented community.

5. Clean energy usage & job trend

Renewable-energy companies will grow at a more faster pace into the future as the utility cost in
using this source of energy continue to decline & becoming more feasible to use. In some cases,
eclipsing the size of oil majors for the first time, so are green jobs.

6. With this growing global urgency around climate, conversations about the energy transition will become
increasingly nuanced.

We saw an absolute explosion of net-zero commitments from companies and countries surrounding
the Paris Agreement. These ambitious targets mean companies and investors will be having some
difficult discussions around the energy transition in 2021. BNP Paribas in particular, will have to
exit the relationship with at least 30% to 50% of their current clients in the power generation
business.

Conclusion

Environmental, social, and governance (ESG) data were a minor part of all investment data 5–10
years ago and now are a very significant data source when looking across all data use at
investment organizations. Going forward, we can expect a greater degree of urgency from the
industry to make significant progress, with a stronger framework likely to emerge. The following
actions are deemed necessary:

 Improved transparency of the entire ecosystem (such as alleviating duplication of activity

and unintentional conflicts)

 Effective and active cross-system interactions (such as incorporating more of the end user’s
needs)

 Stricter harmonization of methodologies for measuring key performance indicators (KPIs)

related to ESG (such as enhancing the comparability of KPIs to help the decision making of
investors and others)

Investment organizations seeking to achieve a competitive advantage with their ESG analysis
will recognize that technology is a necessary foundation. The discussions on technology and data
in our roundtables demonstrated that the technology opportunity was growing for all, with more
data sources becoming available and more differentiation possible.