Ever. So. Good.
ESG can stand for all kinds of things. But since 2018, at the latest, it has mainly been understood to refer to the “environmental, social and governance” aspects of sustainability. Most companies have now engaged with the subject in some way, and many already adopted an ESG strategy. According to a Berenberg survey, 96% of all German companies (foundations representing one third thereof and asset manager another 20%) stated that sustainability has become a part of their investment philosophy.
And 85% of all companies are familiar with SDG. But how do you practice ESG sustainability?
E like “elaborate”
A good way to elaborate ESG is by contextualising it with the respective investment strategy. In fact, the term “ESG investing” has gained currency when referring to an investment strategy that takes ESG criteria into account. A similar acronym is SRI (for “socially responsible investing”) while some market player also speak of “themed investments.”
We need to differentiate between the following ESG strategies in this context: 1. ESG integration. This refers to the systematic or systemic integration of financially relevant ESG information in regard to risks and opportunities to supplement conventional investment analyses. 2. So-called “active ownership.” Under this approach, the ESG profile of a company is positively influenced by accessing internal as well as external resources. The proactive commitment is meant to have a direct impact on the behaviour of possibly existing investment partners. But how do you identify investment proposals that meet the ESG criteria?
S like in “screening”
One way to find out is through active “portfolio screening.” To this end, relevant criteria are defined ahead of time (by the investor or by the retained asset manager) and then applied to a certain investment universe that was (pre-)selected according to a given investment strategy. Another option: You undertake a negative screening that uses certain ESG criteria to rule out, or give a lower weighting to, investment opportunities that fail to qualify. This is a good way to ensure that your portfolio consists of investments with above-average ESG ratings.
But there is also the approach of so-called “impact investing.” Under this option, investors acquire interests in companies with a positive sustainability contribution under the ESG framework. A good example for this would be the equity interest in a real estate company which an investor acquires within the framework of a fund vehicle, for instance, and which plans and develops affordable residential accommodation in the form of urban quarters in metro areas.
So, how relevant have the decisions based on ESG criteria been that were made so far, and how have they impacted the market?
G like “growth”
To answer this question, it helps to take a quick look at the growth of global ESG-compliant assets (meaning investments in assets that meet the ESG criteria) in absolute figures.
The figures of the Global Sustainable Investment Alliance (or “GSIA” for short) provide a more or less reliable picture. Between 2012 and 2016, the volume in global ESG assets increased by almost 75% to nearly US$ 23 trillion. Interesting to note, Europe seems to play a key role here with an overall share of more than 50%. Another interesting fact is that these investments favour the “portfolio screening” approach, trailed at considerable distance by the “ESG integration” approach.
ESG represents an important criterion for the selection of suitable investments and may play a decisive role in future. The current regulatory framework speeds this up further by raising the bar for more transparency through the EU Action Plan and the upcoming MiFD guidance.
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