Of late, the meager opinion that investors have about ESG investors has changed. The fact that proper management of resources, ethical corporate administration, and social equity help in elevating productivity and profits is right on the table.
SG Drivers and Barriers
Risk management and client demand are considered the main drivers of ESG. But, what is ESG? The sole idea of investing revolves around the fact that the profitability of any company depends on its corporate sustainability, which is calculated by environmental (E), social (S), and governance (G) factors.
According to experts, managers who apply ESG factors under their risk management strategies start with the governance aspect as it is easier to assess regularly. Moreover, its impact can be easily appreciated due to its recurrence.
The incorporation of E and S factors aims at getting a comprehensive view of the company to safeguard and enhance the investment’s economic value.
While on one hand, portfolio managers are recalibrating, investors are trying to create poise between their financial future and personal values.
According to the reports, at the beginning of Q1 in 2019, the flows in the US’s sustainable fund multiplied materially. 1Q19 recorded more than double inflows as compared to 1Q18. The same pattern was repeated with 1Q19 and 1Q20. This came as a big surprise given the fact that the USA is not as competent in terms of ESG investing as Europe, which is considered sustainable investing’s largest market accounting for over 75% of the global sustainable assets.
Barrier 1
According to experts in the field, the first roadblock to ESG integration is the lack of understanding of the issues and no comparable ESG data; the former being a bigger problem than the latter. However, data enhancements and reporting standards also need attention.
Experts believe that political adulteration has ruined the essence of ESG investing. It is now believed that the ESG values don’t go hand in hand with a business environment that vouches for prosperity and freedom.
Barrier 2
Issuers and investors should agree upon a universal ESG reporting standard to streamline the process of data collection and inculcate quality data.
Most entities believe that ESG investing is the ideal option for investors who wish to enhance their returns by putting their values forward within their portfolio. However, lack of standardization hinders these plans.
The fourth annual Sustainable Development Impact Summit announced that the Big Four accounting firms have adopted a set of metrics to be used by companies for environmental, social, and governance reporting on an international level. Experts in the field believe that this recent development will help in troubleshooting the standardization problem.
Experts say that keeping the portfolio management perspective in mind, the recalibration of risk and demands from the investors is likely to grow in the coming few years.
Financial advisors can take this opportunity to wear ESG as their badge-of-honor. Instead of waiting for their clients to raise eyebrows, the advisors can explain to them what is ESG, while at the same time clearing all their queries and throwing light on the investment options that also let the investors co-ordinate their long-term investment goals with personal values.
