Responsible investing is widely understood as the integration of environmental, social and governance (ESG) factors into investment processes and decision-making. ESG factors cover a wide spectrum such as how corporations respond to climate change, how good they are with water management, how they manage their supply chains, how they treat their workers and whether they have a corporate culture that builds trust and fosters innovation.
The term ESG was first coined in 2005 in a landmark study entitled “Who Cares Wins.” Today, ESG investing is estimated at over $20 trillion in Asset Under Management (AUM). The same study has contributed to the launch of the Principles for Responsible Investment (PRI) and the launch of the Sustainable Stock Exchange Initiative (SSEI).
Institutional investors were initially reluctant to embrace the concept, arguing that their fiduciary duty was limited to the maximization of shareholder values irrespective of environmental or social impacts, or broader governance issues such as corruption. Another major barrier has been a lack of data and the necessary tools to get a handle on the fragmented and incomplete information available.
Cynics may argue that responsible investing is just a fad. But a closer look at the forces that have driven the movement over the past 15 years suggests otherwise. Firstly, technology and the rise of transparency are here to stay. Gathering and processing data will become ever easier and cheaper. Smart algorithms will increasingly allow for better interpretation of non-traditional financial information which seems to be doubling in volume every couple of years. Secondly, environmental changes, in particular climate change, will with scientific certainty put a growing premium on good stewardship and low carbon practices as natural assets will appreciate in value over time. And thirdly, people everywhere are increasingly empowered by technology. ESG investing allows them to express their own values and to ensure that their savings and investments reflect their preferences, without compromising on returns.