The Definition

Standing for Environmental, Social and Corporate Governance, the term ESG was born from a landmark IFC Conference and Report “Who Cares Wins” in 2005 . The report argued that companies that are more sustainable for society and for the planet are also more likely to be more financially sustainable. A new theory of responsible investing was born.

“ESG is just good business sense”

-Sophie Lund-Yates, Equity Analyst at Hargreaves Lansdown, 14.10.2020

So what does ESG mean in practice? According according to a new app rolled out by PriceWaterhouseCooper which aims to create investment-grade reporting data - criteria includes greenhouse gas emissions, employee diversity and inclusion, employee health and safety as well as data security .

ESG Investors apply this kind of criteria in different ways whilst all sharing the logic that companies prioritising ESG may provide greater return on investment. Some investors, such as thematic hedge funds, may create a specific portfolio around one aspect of ESG while other more loose investors advocate a “Best-in-class approach”. With this approach, ESG is one of many factors which plays a role in deciding which companies to invest in.

The Growth

PwC surveyed more than 300 investors and found that three-quarters of them (including pension funds and insurance companies) said that by 2022, they would stop buying conventional funds in favour of ESG products. PwC also stated that new EU rules and a growing focus on sustainability will fuel rapid growth in this area. Forecasts state that sustainable investment products in Europe will reach €7.6tn over the next five years. Whilst ESG investments are historically attributed to European funds, many argue it is now more far-reaching. Europe currently accounts for 76% of all global passive ESG assets but there is now a particular drive coming from Asian investors.

The Challenge

However the difficulty may now lie in the precise definition and assessment of a company’s ESG credentials, especially as much of the data is self-reported by the companies in question. The French financial regulator recently took action over funds exaggerating eco-attributes, when sustainability was only a minor part of their investment process.

Mr Nesis, the Head of the biggest London-listed gold producer, has recently called for common reporting standards in the mining sector – similar to the International Financial Reporting Standards which allow for international comparisons between different regions. Bloomberg has also reported that there is still much disagreement in terms of what constitutes an ESG stock and how this can be assessed. To rectify this, Bloomberg LP is in the process of developing their own scoring system.

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