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Investors, government regulators and nongovernmental organizations are pushing for increased disclosure of environmental, social and governance factors
MOST EARLY PRACTITIONERS of sustainable and impact investing were limited to a single strategy known as negative screening. Simply put, this strategy avoided investing in companies connected to products considered harmful to society, like weapons or tobacco. Portfolios constructed using negative screening often underperformed broader stock indexes, leading sustainable investing to be viewed as a niche strategy, one more appropriate for investors who were willing to accept lower investment returns in order to invest according to their values.
Over the past decade or so, much has changed. Modern sustainable investing is focused as much on return potential as on positive societal and environmental change. Investors are finding they can pressure companies to be more transparent about the sustainability of their supply chains and the environmental and societal impact of their production processes and products. Similarly, environmental, social and governance (ESG) factors have become a more important part of the investment process. There has also been a parallel growth in corporate ESG self-reporting, third-party data analysis, and public and investor demands related to ESG. Amid all these advances, assets under management focused on sustainability have grown from negligible to about one in four dollars of total managed assets.1
Growth in corporate sustainability disclosures (see exhibit 1) and other ESG factors has allowed investors and independent rating agencies, along with academics and stock exchanges, to form increasingly reliable assessments of the risks and opportunities associated with ESG issues and their effect on company performance. While some challenges remain in regard to evaluating sustainability reporting, organizations such as the Sustainable Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI) have developed important sustainability reporting standards that can provide guidance to reporting companies.
Exhibit 1: S&P 500 Companies Sustainability Reporting
Source: Governance & Accountability Institute, Inc. 2019.
As sustainability reporting has grown, stakeholders have helped create a reinforcing cycle that has helped improve the depth of ESG reporting (see exhibit 2). Here’s how it has often worked: Investment managers, institutional investors and others, finding available ESG data useful yet limited, have engaged with companies to improve corporate disclosure. Examples of this include expanding the kind of information released and heightening data accuracy. Third-party organizations have then created guidelines on sustainability standards and ESG metrics that reinforce the cycle.
Exhibit 2: Corporate Sustainability Reporting Cycle
Source: U.S. Trust. 2017. This is intended for illustrative purposes only. It is not intended to be representative of all ESG data.
What this means for investors
For investors, the growing availability of corporate sustainability and ESG data opens the door for new investment opportunities while also creating a complex landscape that requires expertise and institutional knowledge to navigate. Working with an advisor, investors can utilize the enhanced data to better evaluate and pursue both financial and environmental or social impact outcomes. To find out more about corporate sustainability reporting, read the full report here or contact an advisor today.
Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.