ESG: The Future Pillars of Investing

The ESG Explosion

With the ESG (Environmental, Social and Governance) market being estimated to reach $50 trillion over the next two decades [i], it is safe to say ESG is here to stay. This explosion is being driven by an increasingly conscientious world, with voices such as Greta Thunberg ensuring we no longer stay passive in our impact. Investors are increasingly realising the gains to be had from aligning themselves with firms that perform well in ESG criteria, such as risk management and possible financial gains. 

This movement from investors as well as the general public has motivated firms to look in the mirror with regards to ESG performance and how they can improve. With new regulation on the horizon, forward thinking companies are wanting to report their ESG data more frequently and comprehensively. 

ESG is Good for Business

ESG investing is becoming increasingly driven by millennials, who are taking an active role in aligning their personal values and their investing strategies. This investment pattern facilitates the belief that change - now more than ever - is a goal we can reach. If consumer behaviour is more directed towards ‘creating an impact’, what is the logical next step for businesses to thrive? 

Organisations need to become more conscious of their mission and how they communicate it to the public, especially since good ESG metrics and reporting could seriously affect their staff and customer base[ii]

. Today’s start-up culture and the focus on the entrepreneurial mindset further demands this issue to be taken seriously. As well as helping to land conscientious clients and retain millennial job talent, a strong ESG proposition directly correlates to value creation within a business. More than a fad or a feel good exercise,[iii] a stronger esg proposition correlates with higher equity returns. 

Why ESG is Important for Investors

During Q2 2019, ETFs with a sustainability criteria attracted EUR5 billion in net flows; this is more than throughout the whole of 2018[iv]. As demand skyrockets for responsible funds, there is increasing client pressure on investors and asset managers to take ESG factors into consideration. However, there are many other reasons why ESG data provides a competitive edge to investors. 

Firstly, a good ESG performance is a strong indicator that a business is well-managed and, hence, considering ESG data acts as an effective way to manage risk. For example, a recent report from McKinsey states good ESG performance is associated with lower loan and credit default swap spreads and higher credit ratings.[v]

As well as a desire to profit from ESG data, there is ever-tightening regulation meaning investors need to care about it. For example, the EU taxonomy regulation is redefining what it means for an investment to be ‘environmentally sustainable’. Investors are keen to stay ahead of such regulation by having effective methods to monitor the key ESG data points of their portfolio companies. 

Constraints on ESG

Whilst the ESG market is growing incredibly fast, there are a number of constraints on this growth. Financial data has clear, widely-agreed metrics whose implications are straightforward; however, the same cannot be said for ESG data. This can result in an “ESG Data Gap” between businesses and their investors as ESG information is failed to be communicated effectively between the two parties. 

This “Data Gap” is especially obvious in the startup world where sustainable VCs are failing to communicate the ESG landscape of their portfolio companies effectively to their LPs. Finally, there is also ever-tightening regulation surrounding ESG disclosure for Asset Managers and FIs generally. It is difficult to integrate these effectively into procedures leading to inefficiencies. 

Our series of blogs will delve deeper into the ESG world and these problems which plague it. 

[i] Complete guide to sustainable investing

[ii] Five ways that ESG creates value

[iii] ESG framework

[iv] https://www.wealthadviser.co/2020/01/06/281642/how-artificial-intelligence-transforming-esg-data-and-indices

[iv] https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/five-ways-that-esg-creates-value

As demand skyrockets for responsible funds, there is increasing client pressure on investors and asset managers to take ESG factors into consideration.

 

a good ESG performance is a strong indicator that a business is well-managed and, hence, considering ESG data acts as an effective way to manage risk.

Data Innovation, Investment behaviour research

Environmental Social Governance (ESG) & Sustainable Investment

Client propositions and products in data driven transformation in ESG and Sustainable Investing. Previous roles include J.P. Morgan, Morgan Stanley, and EY.

Upcoming blogs:

This is the first in a series of blogs that will explore the ESG world: its growth, its potential opportunities and the constraints that are holding it back. We will explore the increasing importance of ESG and how it affects business leaders, investors, asset managers, regulatory actors and more.

Artificial Intelligence: the Solution to the ESG Data Gap? In the second part of our Environmental, Social and Governance (ESG) blog series, Anya explores the potential opportunities surrounding Artificial Intelligence and responsible investing.

Riding the ESG Regulatory Wave: In the third part of our Environmental, Social and Governance (ESG) blog series, Alejandra explores the implementation challenges of ESG regulations hitting EU Asset Managers and Financial Institutions.

Is it time for VCs to take ESG seriously? In the fourth part of our  Environmental, Social and Governance (ESG) blog series, Ben explores the current research on why startups should start implementing and communicating ESG policies into their business.

Now more than ever, businesses are understanding the importance of having well-governed and socially-responsible practices in place. A clear understanding of your ESG metrics is pivotal in order to communicate your ESG strengths to investors, clients and potential employees.

By using our cloud-based data visualisation platform to bring together relevant metrics, we help organisations gain a standardised view and improve your ESG reporting and portfolio performance.  Our live ESG dashboard can be used to scenario plan, map out ESG strategy and tell the ESG story to stakeholders.

AI helps with the process of ingesting, analysing and distributing data as well as offering predictive abilities and assessing trends in the ESG space.  Leading Point is helping our AI startup partnerships adapt their technology to pursue this new opportunity, implementing these solutions into investment firms and supporting them with the use of the technology and data management.

We offer a specialised and personalised service based on firms’ ESG priorities.  We harness the power of technology and AI to bridge the ESG data gap, avoiding ‘greenwashing’ data trends and providing a complete solution for organisations.

Leading Point's AI-implemented solutions decrease the time and effort needed to monitor current/past scandals of potential investments. Clients can see the benefits of increased output, improved KPIs and production of enhanced data outputs.

Implementing ESG regulations and providing operational support to improve ESG metrics for banks and other financial institutions. Ensuring compliance by benchmarking and disclosing ESG information, in-depth data collection to satisfy corporate reporting requirements, conducting appropriate investment and risk management decisions, and to make disclosures to clients and fund investors.

by Thushan Kumaraswamy