New Delhi, April 4, 2024: Environmental, Social, and Governance (ESG) related investment policies have witnessed a significant jump in interest among investors in the last five years, notes a recently released study by Deloitte and the Fletcher School at Tufts University. The study, which surveyed over 1,000 asset owners, asset managers, and investment advisers across North America, Europe and Asia, found that 79% of its respondents have established ESG investment policies, up from a mere 20% five years ago.
The study highlights various reasons driving this trend, including investors wanting to minimise risks and capitalise on new opportunities related to sustainability. This interest comes in the background of the world economy showing promises of reaching USD 43 trillion in growth between 2021 and 2070, if the goal of net-zero emissions is achieved.
The study points to three factors that have a major influence on sustainability investing policies: regulatory requirements, improved financial performance, and the influence or pressure of stakeholders. Regulatory requirements seem to be on top of investors’ minds with 39 per cent of the respondentsclaiming it to be the most important driver in their decision-making process, while 37 per cent of the respondents looked to improve the financial performance of their investment.Investors are also increasingly influenced by factors like improved social outcomes and environmental impacts.
In fact, investors are increasingly factoring in ESG reports as part of their due diligence process. However, most investors are impacted by information pertaining to the aspect of Governance. 51 per cent of the respondents believe Governance to be a ‘very important’ factor impacting their investing strategy, followed by Social (44 per cent) and Environmental factors (41 per cent).
Despite the widespread use of sustainability information for investment analysis, investors believe that ESG factors are not yet uniformly or effectively reflected in equity prices.This is despite the fact that 83 per cent of the respondents claim to use ESG reports for their analysis, with 34 per cent referring to them ‘regularly’ and 49 per cent using them ‘often’.
According to the report, the biggest challengeto sustainable investing comes from the fact that there is a lack of clarity on how to integrate ESG information. The other major challenges include inconsistent data regarding ESG ratings, and even over or under regulation. Many investors have quoted issues, such as cost, lack of clear strategies, and lack of measurable outcomes discernible from corporate disclosures. 24 per cent of the respondents even ‘strongly agree’ that there may even be pressure from stakeholders against integrating ESG factors.
Michael Bondar, Risk & Financial Advisory principal and global enterprise trust leader at Deloitte, says, “There is considerable room for improvement in how organizations collect, measure, report on, and validate sustainability data to earn investor trust. But, more consistency and dependability in sustainability reporting for measurement and analysis purposes should help enhance confidence for stakeholders throughout the corporate ecosystem.”
While investors consider ratings to be an important part of their analysis, they accept using them selectively, sometimes focussing on individual rating components to gain more comprehensive insights into the risk. Also, for ratings, investors are likely to use data sources that they trust. This can include in-house proprietary data systems and audited or assured corporate disclosures.
However, surveyed investors believe that ultimately government regulations would help bring clarity to the data challenges they currently face by ensuring consistent and standardisedsustainability disclosures by corporates.
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