Responsible investing is gaining traction, but the patchwork environment of definitions and frameworks remains a challenge
Sustainable investment has seen an uptick in support as more investors and asset managers recognize the financial, social, and environmental risks that come with short-term thinking. At the same time, there’s been increasing awareness that ignoring ESG factors could lead to threats that hurt investment performance.
Despite that increasing acceptance, one significant obstacle to mainstream adoption remains. “Measurability and comparability of non-financial performance are perhaps the biggest hurdles to ESG investment growth,” said BNY Mellon in a new report.
Almost seven in 10 asset owners currently cite inadequate information as the biggest challenge in adopting ESG principles. And according to research by the CFA Institute, 55% of investment managers report a “lack of appropriate quantitative ESG data” as a limitation in the use of non-financial information in the investment process.
There’s progress being made. BNY Mellon noted that the PRI Association, the UN working group behind the six Principles for Responsible Investment (PRI), published concrete guidelines for asset owners to devise investment strategies that fully consider sustainability factors. And in partnership with the CFA Institute, the association recently published best-practice guidance on ESG integration based on case studies across equity and fixed income.
Corporate sustainability disclosures have so far not been fully consistent or in conformity to the UN’s Sustainable Development Goals (SDGs), but more firms are increasing their commitments and frameworks and recommended best practices are being developed globally. On the side of government regulation, the European Commission has issued an action plan entitled Financing Sustainable Growth, along with an initial set of legislative proposals to support the plan.
But as all of these efforts get under way, the lack of international standards on validating investments’ ESG credentials has left asset owners no choice but to leverage industry-level work. That includes definitions, principles and frameworks, proprietary evaluation methodologies, and new tools from established data providers.
“[A]sset owners’ efforts to understand their investments’ performance against non-financial targets are blurred by the sheer number of SDG targets (169), not all of which are easily measurable,” the BNY Mellon report said. “Whilst GRI and UNGC establish a ‘unified mechanism’ for comparable and effective SDG reporting, most companies use pre-existing reporting standards.”
With the lack of global standards, investors are approaching ESG investment based on their own priorities. The report identified three approaches that typically drive investors and define the information they look for:
- Value alignment – screening out companies that go against a set of convictions and priorities
- ESG integration – using ESG scores to inform risk mitigation or alpha-seeking strategies
- Thematic impact – selecting suitable investments based on their ability to meet specific impact measures and goals