Sustainable investment is on the rise – here’s how to connect the dots

investment

(Markus Spiske

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Katherine Brown, Head of Sustainable and Impact Investing Initiatives, World Economic Forum


Sustainable investing reportedly topped $30 trillion at the start of 2018. This is not only a large sum, but also a 34% increase in two years – and more than double the amount in 2012.

What’s the World Economic Forum’s Sustainable Development Impact summit?

It’s an annual meeting featuring top examples of public-private cooperation and Fourth Industrial Revolution technologies being used to develop the sustainable development agenda.

It runs alongside the United Nations General Assembly, which this year features a one-day climate summit. This is timely given rising public fears – and citizen action – over weather conditions, pollution, ocean health and dwindling wildlife. It also reflects the understanding of the growing business case for action.

The UN’s Strategic Development Goals and the Paris Agreement provide the architecture for resolving many of these challenges. But to achieve this, we need to change the patterns of production, operation and consumption.

The World Economic Forum’s work is key, with the summit offering the opportunity to debate, discuss and engage on these issues at a global policy level.

Clearly, many investors take this seriously now, shifting assets from conventional portfolios to those managed against Environmental, Social and Governance (ESG) criteria. The term “ESG” is now mainstream in the investment community.

And while there is no “but” here, there is a “better.” We could do much better. And doing better is the only way that we could possibly achieve the ambitious UN sustainable development goals.

Image: World Economic Forum

The full potential of sustainable investing has not been realized – yet

While “ESG” is a buzzword, we still have a long way to go until the volume of sustainable investments surpasses the volume of non-sustainably managed portfolios. Investors and asset managers are often put off by the complexity of the task. They have a hard time accessing, understanding, and integrating information about the ESG performance of companies into their decision processes and investment systems, which have been tailored for conventional financial information.

Fifteen years ago, there was barely any information of this kind available. Nowadays, the problem is not so much the quantity of information, at least not for companies in Europe and North America, but rather the quality and comparability. For example, the question: “Is company X performing better on gender diversity than company Y?” is impossible to be easily answered despite the seeming simplicity of the metric. In a case study, described in the World Economic Forum’s white paper Seeking Return on ESG, 15 companies from the fast-moving consumer goods sector used 22 different employee classifications, of which 16 were synonyms for “senior management”.

Shedding light on the sustainable investing ecosystem

Over the years, a myriad of organizations has understood this challenge and set off to help, thereby developing a whole ecosystem for ESG reporting and integration. The system consists of organizations developing guidelines and setting standards for companies who report sustainability information, agencies that rate and rank companies accordingly, and a multitude of initiatives driving sustainable business and investment practices. The ecosystem has become a jungle.

The Forum’s ESG ecosystem map was developed to help chop your way through the undergrowth. It clusters and describes some of the most prominent ecosystem players, and it shows how the individual players are interwoven. The roughly 50 players currently on the map are connected to each other via more than 180 points, through partnerships and joint initiatives, data sharing, and common founding members.

Why convergence is needed

These 180 ties are more important than one might think. Yes, they make the ecosystem more complex. But they are also the only chance for much-needed convergence.

At the moment, companies are overburdened with different ESG reporting standards and rating requirements, and investors are confused about which information to look for and which ratings to trust. The multitude of standards, solutions, and initiatives makes the ecosystem so complex, that frustration is the prevailing sentiment.

 

This frustration has led to a trifecta of pressures on the ecosystem from those who have the most to gain from it: from investors, who want more meaningful and simplified information; from corporates, who want clear, unison guidance on what and how to report; from regulators, who aim for quicker and more material shifts in capital markets aligned with their environmental and social mandates. If markets don’t move faster in the right direction, it is becoming clear that regulators will need to step in to further influence the process.

As the 180 ties show, the key players are on the right track to become more than the sum of their parts. The question is: How quickly and how radically can we make this convergence happen to give us a real shot at achieving our sustainability goals?

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