Socially responsible investing (SRI) is not a new concept, with some believing it dates back millennia. Modern SRI investing options began as early as the 1970s in the United States.
The popularity of Environmental, Social, and Governance (ESG) factor thematic funds has risen notably in recent years. Passive management is taking the spotlight, however, accounting for over two-thirds of those same inflows.
ESG risk ratings providers have divergent standards. According to MIT Sloan, providers disagree on what factors should be observed, how they are graded, and measurement weights. This complicates both corporate and investor assessments regarding the true extent of ESG risk performance.
As a result of incongruent ratings across providers, investable universes and performance metrics differ meaningfully across providers. Correlations can also vary significantly depending on the provider, region, and specific ESG component. Widely differing results further point to measurement standardization issues in the ESG space.
SRI isn’t only a domestic phenomenon, but a worldwide affair. Europe, Japan, Australia, and New Zealand have all seen a significant rise in sustainable assets over the last half-decade. Demand isn’t the only reason for the build-up, but also a growing body of ESG-centered regulations that have emerged over the past several years in multiple regions.
So-called “dirty industries” will have an increasingly difficult time raising capital as ESG regulations become commonplace. Companies in these sectors will increasingly need appropriate sustainability disclosures, evidence of plans for reduced greenhouse gas (GHG) emissions, and membership in forward-thinking trade groups to maintain access to capital markets.