Using the markets capitalization and shares traded benchmarks, NASDAQ and the New York Stock Exchange are the top two stock exchanges in the world, with a combined market capitalization of just over $45 trillion. Together, their 6,500 listings now need to rigorously examine the question, “What is ESG investing and how will ESG compliance and reporting affect the way we do business and, more importantly, our share price?”
Similarly, investors and asset managers have now immersed themselves in ESG investments. As of December 2020, a surprising 33% of managed assets in the U.S. worth some $51.4 trillion fall into the “sustainable and responsible investment” (SRI) category.
So what’s the deal with ESG investments? Read on for the briefest of explanations.
The Start of Socially Responsible Investment
In 1992, two things happened. The first was the Rio de Janeiro Earth Summit in June, which gave rise to the Rio Declaration on Environment and Development. That document was one of the first-ever to mention “sustainable development”. At the time, most people wondered whether ” sustainability” was a real word.
December of that year saw the publication of The Cadbury Report on corporate governance. These two events prompted quoted companies around the world to start reporting on more than just their annual financial statements. The need for transparent disclosure on financial, environmental, social, and corporate governance matters leaped to the foreground.
Everyone wondered just how sustainable these endeavors would be, But, hey presto! Almost thirty years later, ESG (environmental, social, and governance) reporting has gained so much traction that sustainability criteria have become serious investment considerations.
What Is ESG Investing?
ESG investing is investing in companies that engage in ethical practices and good governance. Frameworks and standards that deal with these issues in an attempt to achieve some sort of uniformity in ESG disclosure are:
- The Task Force on Climate-Related Financial Disclosures
- The Sustainability Accounting Standards Board
- The CDP – Carbon Disclosure Project
- The CDSB – Climate Disclosure Standards Board
- The GRI – Global Reporting Initiative
- The IIRC – International Integrated Reporting Council
With the mushrooming of so many different, but not dissimilar frameworks and standards, it is hard to see the wood for the trees. SRI has been criticized by many for not having a solid set of metrics and being somewhat “fluffy”, while GRI has a comprehensive set of metrics.
Yet even GRI has become less prominent in the wake of the Europen Union’s Regulation on sustainability‐related disclosures in the financial services sector (the SFDR, for short). Sustainable Finance Disclosure Regulation came into effect in March 2021.
The regulations were formulated as a result of the United Nation’s 2030 Agenda for Sustainable Development, which the EU heartily endorses. In fact, the EU is putting its money where its mouth is, in the form of around EUR 1 trillion for green investment in the next ten years.
Evan Harvey NASDAQ Global Head of Sustainability confirms that “Nasdaq integrates sustainability best practices in its global operation, transparently reports progress to stakeholders, and rigorously advocates for better and more actionable capital market standards”. That will certainly be helpful when companies seek to incorporate the “net zero by 2050” initiative kicks into high hear.
Sustainability Reporting Based on Hard Data
Investors crave ESG data that is both relevant and easy to digest. Key in ESG reporting, disclosure, and methods of calculation is consistency. Your ESG disclosures must be backed up by hard data. Favorable ESG ratings will be rewarded with investor interest. Misleading or superficial sustainability data will have investors running a country mile.
What is ESG investing going to do for your ROI? Don’t worry, all current indicators suggest that a portfolio of ESG investments will be just as profitable, if not more so, in the years ahead.
What ESG investments will do is have a positive effect on mitigating climate change. And, quite frankly, that’s got to be worth something.
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