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It’s the fifteenth anniversary year of United Nations’ Who Cares Wins report, where the financial industry asked the world to include environmental, social, and governance evaluations when measuring firms’ potential for financial success. It’s time to look at what’s now and what’s next for ESG.
ESG – FROM ENERGY TO EVERYTHING
Even before Who Cares Wins, analysts were examining the environmental impact of investments in the energy sector. When the science of the analysis evolved, public focus took on a broader definition of impact and institutional investors demanded better predictors of investments’ potential for long-term success, so ESG analysis moved to the broader market.
Advancements in data technology and more detailed disclosure requirements made ESG-related information about companies easier to access. Data science degrees spread across the academic sector due to the booming demand for talent, and a tech-native generation of analysts hit The Street.
The original Who Cares Wins report mentioned the need for ESG measurement uniformity if ESG analysis were to succeed. But while things are still not standardized (ESG analysis is, after all, the intellectual property of the researcher), the tools available to analysts and the ESG pillars that they measure are coming together, thanks to the involvement of the investing community and of governing bodies. As a result, investors are gaining confidence in the validity of the research and in the viability of investment decisions based on the research. Now, ESG is well on its way to a successful transition from Wall Street to Main Street.
GETTING THERE FASTER
The end game will be analysts’ natural inclusion of ESG measurement in company evaluations. Until we get there, investors are looking for more ESG-themed choices and advisors and sponsor firms are on the hunt on their behalf. ESG listings drew $750 million1 in one recent month, and are estimated to account for 36% of US and 56% of European assets. This growth will continue and will accelerate as long as the industry can manufacture product to meet the demand.
Today, most ESG products are mass-customizations of existing portfolios that are overlaid with generic “ESG” or specific “No Gambling” or “No Weapons” rules. These products will grow, but if their operating model requires maintenance of multiple versions of portfolio models, they will be difficult to manage.
Technology is available to take the next logical step, with automated versioning of models and the personalization of customized ESG portfolios. In both cases, technology supports both filtering out or diminishing holdings in “bad actors” and increasing holdings in “good actors.” Data access and technology advancements are converging to make the offering possible and scalable, so investment firms can use ESG to expand distribution of their investment expertise.
And as a result of current ESG analytical expertise, technology, and data availability, the next five years will be the most fast-paced and exciting.
It was interesting and funny to me that the original UN Who Cares Wins report2 was published with the file named Who_Cares_Who_Wins. It’s so true! Who cares who wins? Scalable customization of ESG lets sponsors and investors define and achieve the “win” they want. And in this way, everyone wins.