Progress has been made in integrating ESG (environmental, social, and governance) factors by institutional investors, it must continue.
Institutional investors now face some challenges about their commitment to ESG. Many realize that these issues including climate change, workplace diversity, and long-standing corporate concerns such as executive compensation can drive risks and returns.
Many large institutional investors have publicly committed themselves to integrate ESG factors into their investments in sustainability
The Principles for Responsible Investment (PRI) have been signed by more than 1,500 investors and managers, representing nearly $60-T in assets under management.
It is clear that many investors have struggle to convert their commitment into practice.
For example, less than 1% of the total capital of the 15 largest US public pension funds is allocated to ESG-specific strategies, such as ESG-screened passive indexes, active management using ESG insights, or private-market management with a fully integrated ESG strategy.
Moreover, many institutional investors continue to treat ESG as a sideshow rather than an integral part of their investing.
While ESG and corporate-governance teams are commonplace, they are often held at arm’s length from core investment activities.
Even the most successful funds have integrated ESG unevenly. While sustainable-equities strategies such as low-carbon indexes are no longer quaint, most funds have not expanded ESG integration to other asset classes.
Members of the PRI agree more is required. Its board is considering a change that would allow it to remove signatories that have not made sufficient practical progress.
That is not to say that the industry has been standing still.
The fact is that 3 big problems have cracked, setting the stage for continued growth.
Many institutional investors have struggled determine which ESG concerns are relevant to particular investments.
In response, some leading institutions have embraced the idea of “materiality,” derived from the concept of material information in accounting.
Much as knowledge that could influence investors’ decisions is deemed material, so too are ESG factors that will have a measurable effect on an investment’s financial performance.
According to a recent study using the materiality framework of the Sustainability Accounting Standards Board (SASB), companies that address material ESG issues and ignore immaterial ones outperform those that address both material and immaterial issues by 4% and outperform companies that address neither by nearly 9%.
ESG materiality is the heart of global investment strategy.
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