Even as COVID-19 devastated global markets in the first half of 2020, ESG investment hit record highs. More than 70 billion was moved into sustainable funds between April and June, bringing total investment in ESG funds to a staggering record sum in excess of $1 trillion. What drivers are behind ESG investment’s remarkable rise and what ESG criteria are used to assess if a company is genuinely committed to sustainability?
3 reasons ESG investment is on the rise
While global markets fell sharply as the COVID-19 pandemic spread earlier this year, investors moved a record amount of money in to sustainable investment funds. The Financial Times reports that ESG funds received net investment of over$70 billion between April and June, bringing total ESG investment above the $1 trillion mark. An analysis by the funds network Calastone found that new money invested in ESG equity funds in that time period exceeded the combined totals for the previous five years.
A clear trend is emerging, then, but what is driving it? There are three main reasons:
- Rising ethical expectations from consumers and investors. As people become more aware of the impact of climate change, the gender gap in the workplace, forced labour and other issues, they expect companies top lay apart in solving these challenges. And increasingly, consumers and investors are using their purchasing and investing power to encourage ethical business practices.
- Uncertainty in the markets encourages a focus on the long-term. During the pandemic, numerous companies have declared bankruptcy and many more will likely follow. Investors regard companies with a sustainable focus as being better placed to survive fluctuations in the long-term. For example, companies with an ESG focus are more likely to attract employees who want to do good, and therefore less likely to be involved in bribery, corruption, or money laundering.They are also more likely to plan properly for future market-moving shocks like climate change.
- The success of ESG funds and ESG-focused companies. The evidence base is growing that purposeful companies and funds are more likely to turn a profit. For example, B Corporations such as Patagonia and Tony’s Chocolonely are among the market leaders in their industries, while a fund focused on the UN’s Sustainable Development Goals has outperformed most of the main market trackers in recent years.
Get the right data to assess ESG credentials
ESG investment is not as simple as investing in companies or funds who claim to be environmentally beneficial or to support the SDGs. Investors and companies must carry out due diligence to ensure ESG commitments are genuine.
This is not easy. Fashion retailer Boohoo received a double A rating for ESG from the MSCI index in June this year. Weeks later, the public learned Boohoo was paying workers in a UK factory below the minimum wage to work in poor conditions.
“The fact that Boohoo ended up in so many sustainable funds shows the callous infrastructure of our investment system, and its participants,” said Martin Buttle of the responsible investment group Share Action. Often, ESG ratings are based on data provided by the companies themselves. Where this data is inaccurate, it could be because of deliberate misreporting or more likely based on a company having an opaque view of its own supply chain.
What should investors do? In addition to checking ESG indexes, investors can surface potential risk issues related to ESG factors with relevant data and technology.
- Use an adverse media feed to power predictive analytics or integrate into risk management tools to gain valuable insights into potential regulatory, reputational, financial, and strategic risks facing companies. If a firm has been criticised for its labour practices in a particular country, for example, this might call its ESG commitment into question.
- Review Critical Mention broadcast content to capture the full context of a company’s position on ESG issues. While a newspaper headline might cherry-pick a single quote from a CEO, a transcript of the full interview may help establish the extent of a company’s ethical commitment.
- Tap into data spanning PEPs, sanctions, watchlists, and blacklists to identify potential regulatory misconduct by firms and the third parties with whom they do business. For example, is a firm claiming a commitment to ESG using suppliers that been convicted of damaging environmental practices?
Explore how Nexis® Solutions helps companies address ethical expectations with access to an unrivaled source universe via powerful platforms for conducting due diligence and third-party risk monitoring and via flexible data APIs.