ESG Investing Is ‘Soaring.’ What Does It Mean?

As the big UN Climate Conference known as COP27 wraps up in Egypt, a new PwC report found that Investors globally are embracing Environment, Social and Governance (ESG) investing on a massive scale – “seen soaring 84%” to $33.9 trillion by 2026 but what does that mean? That’s a whopping 21.5% of total assets under management, or more than $1 for every $5 invested. But so what? Is this a temporary trend? What does it mean exactly?

It could mean that ESG is finally having a profound effect across the economy, incentivizing the transition to clean energy, resilient infrastructure and social equity. But well, it’s complicated.

Investors – and the public – are demanding more transparency, disclosures and socially responsible leadership from companies. That’s why the U.S. Securities and Exchange Commission (SEC) is finalizing its climate risk disclosure rules, and why the European Union issued its benchmarks and disclosures.

Regulations and disclosure requirements, like values, vary across the globe. “It really is very different from region to region, but the very basic thing is, do no harm, transparency,” Mike Chen, Ph.D., the head of the Europe-based asset management firm Robeco’s Alternative Alpha Research Group, said in a recent ValueWalk webinar on “How Investors Should React To The Changing ESG Environment,” where I was a panelist as well.

According to the PwC report, ESG-oriented assets under management (AUM) will “more than double” in the United States to $10.5 trillion; to rise 53% in Europe to $19.6 trillion; and, to more than triple in the Asia-Pacific (APAC) region to $3.3 trillion in 2026. Africa, the Middle East and Latin America are investing aggressively in ESG products as well, according to PwC.

Are investors and the SEC just catching up to the markets? Or something more?

But is this the SEC and mainstream institutional investors just catching up to the markets? Reacting to a fleeting trend? Or, a sign of fundamental shift?

“The climate emergency is urgent and climate risk is financial risk. And the SEC is all about the protection of investors and the financial markets,” Kristina Wyatt, who led the SEC’s task force developing the new climate risk disclosure rules, said in an exclusive interview on Electric Ladies Podcast. “You have this looming financial risk, that’s not being adequately addressed.…And, investors were saying, ‘look, the information that we’re getting just doesn’t cut it. It’s not sufficiently clear, consistent, comparable, reliable. We need more and we need the SEC to step in and provide clearer guidance, clearer rules to help ensure that investors are getting the information that they need.’”

Companies already have to report more as a result of market demands and the range of ESG-related standards out there – including the Sustainable Accounting Standards Board (SASB), GRI, and the Task Force for Climate-related Financial Disclosures (TCFD), which the SEC’s rules are based on – but there’s no consistency.

The really important thing I think about this (SEC) rule,” Dr Jule Gorte, SVP of Sustainable Investing at IMPAX Asset Management and a 30-year veteran of impact investing, explained on Electric Ladies Podcast, “is that if companies are going to be on the record as having a certain level of emissions, especially as climate change gets worse, there’s going to be increasing scrutiny and pressure on them to reduce those emissions.”

ESG-related tracking and reporting systems, and other strategies, are in demand and being implemented across industries. Is this a response to the growth of ESG investing? Or, a sign of something more?

As Eisner Amper audit partner R. Charles Waring put it on their “ESG In Focus” podcast recently ESG “is the cost of doing business on a go-forward basis…The more that an organization resists, they put themselves at risk for future business with their customers and stakeholders.”

That may be why more and more companies are embedding sustainable practices in their operations over the past few years, as seen in various strategies. One is a surge in ESG-related enterprise-wide tracking and reporting software systems. Another is, industrial and technology giant Honeywell found in their new quarterly Environmental Sustainability Index that ~92% of companies plan to increase spending in their environmental and sustainability initiatives. A third is the surge in hiring “green” talent, which is up 38.5% since 2015, according to LinkedIn’s 2022 Green Jobs Report.

These trends reflect the “ecosystem” that Lefeng Lin, a hybrid investment manager at Southern Asset Management in China, said on the ValueWalk webinar is needed: “We need to build up a complete ecosystem to boost the long-term development of ESG, and the establishment of this ecosystem must be jointly participated in and promoted by all stakeholders such as the government, the enterprise, and the investment end so that ESG investment can go further.”

The ripple effect of the massive growth in ESG investments may signal that we’re at a tipping point that’s shifting “business as usual.”

The more sustainability-related systems, strategies and talent get embedded in companies, institutions and investment standards, the more they will make a difference and the more permanent they will become. The more permanent they become, the more of an impact they will have. The more various stakeholders and shareholders demand environmental and social disclosure and measurable action, the more leadership teams and boards will be held accountable for them.

“In essence, ESG investing represents an idea, a reflection of values. Repeatedly in the past two years, the global pandemic outbreak and geopolitical conflict, climate, ecological deterioration, and energy and food shortages, force us to rethink the sustainable development of society and our common future,” Lin said.

Covid showed us how countries and competitors can collaborate when they – we – want to, when our lives depend on it.

Our lives and planet depend on it now.

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