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Mainstreaming the ESG Investments

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Global climate change has made the binding international goal for a transition to a low carbon economy under 2 degrees, inevitable. The recent new EU Sustainable Investment Disclosure Rules, the new EU Directive for Non-Financial Reporting, the UN Sustainable Development Goals, the market-driven self-regulation initiatives such as TCFD, the market proof as well as studies that show, that on ESG KPIs reduce risks and identify opportunities, the demand from institutional and retail investors for more ESG relevant products, the demand from clients and society for more transparency in investments and more sustainable brands, the weak corporate governance and recent scandals due to it, water scarcity, community conflicts, resource depletion, supply chain breakdowns, worker well-being, economic & gender inequality etc. has made ESG Investments become imperative for successful corporations, asset owners and asset managers.

ESG market growth trends figures & trends, the outperformance of ESG indices & funds VS Mainstream Indices & funds as well as relevant ESG studies, confirm, that companies and investors with strong sustainability cultures & good ESG KPIs outperform their laggard peers. The business case for integrating ESG factors into mainstream investment practices has never been stronger.

ESG factors are now integrated into the investment strategy. In fact, most mainstream market players internationally not only offer already a variety of ESG products/funds but also promote them in an active way. Following are the reasons for this.

  • ESG Market in terms of total ESG assets under management, new ESG products/funds, number of new ESG players, which turn from mainstream to ESG, which offer also ESG products, number of PRI Members, all are growing rapidly and there is an ongoing positive trend, especially in Europe after the new relevant EU Sustainable Investment Disclosure Rules.
  • ESG funds perform in general well and in some cases outperform in comparison to mainstream funds, especially during turbulent times and on midterm – long term timeframe.
  • The policy at the EU level (EU Sustainable Investment Disclosure Rules since March 2019) but also national initiatives (Initiatives in France, Netherlands, Luxemburg, Germany, UK etc.) encourage ESG investing.
  • The materiality of ESG factors on financial performance and risk evaluation is becoming mainstream.
  • Institutional Investors ask for Investment strategies with ESG factors.
  • NGOs & Society put pressure for more ESG Investments & for brands with a sustainable approach.
  • ESG Metrics give the possibility to investors to identify gaps in corporate governance, regulatory, reputation, environmental, social, operational, market, sectoral risks, which the financial KPIs do not show.
  • ESG gives a chance to evaluate & analyze the non-financial KPIs & how sophisticated is the company’s strategy.

The new EU regulation on Sustainable Investment Disclosure Rules sets out how financial market participants and financial advisors must integrate environmental, social or governance (ESG) risks and opportunities in their processes, as part of their duty to act in the best interest of clients. It also sets uniform rules on how those financial market participants should inform investors about their compliance with the integration of ESG risks and opportunities.

The recent relevant EU Regulation is contributing in that direction, but there is a need for adoption of ESG common international standards like we have the international accounting standards.

Thank you for reading. In addition, your thoughts and inputs will genuinely make a difference to us. Please drop a line and help us do better.

Regards,
The CSR Journal Team

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