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ESG Is Here to Stay!

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By 2025, ESG assets are estimated to exceed USD$50 trillion. In other words, one third of assets under management (AUM) will be classified as ESG assets in the next three years.

Some recent developments spurring the push for ESG include:

  • In 2020, the Big Four accounting firms launched a set of unified metrics on ESG disclosures. The same year, the Chartered Financial Association (CFA) Institute unveiled its first-ever global consultation on ESG.
  • In March 2021, the European Union enacted its Sustainable Finance Disclosure Regulation (SFDR) to regulate what can be legally labelled a “green” financial product. More recently, it is in the process of ironing out its rulebook on what constitutes a sustainable investment per sector.
  • The COP26 climate summit in November 2021 established the new International Sustainability Standards Board (ISSB) to regulate ESG disclosure standards, with offices to be opened in Montreal and Frankfurt.
  • Disclosure frameworks such as the Sustainability Accounting Standards Board (SASB) and the Taskforce on Climate-Related Financial Disclosures (TCFD) are gaining greater traction as governments move to mandate ESG disclosures for publicly listed companies.

The way things are going, ESG integration into financial markets may one day be so seamless that “ESG investing” will become simple investing.

While a healthy skepticism remains over greenwashing – falsely claiming investments or products to be sustainable using misleading information – it is nevertheless in a company’s best interests to incorporate ESG with sincerity. The data reveals why.

The University of Oxford and Arabesque Partners found that, of the 200 studies they reviewed on sustainability and corporate performance, 90% showed that strong ESG policies were correlated with lower cost of capital; 88% showed that they resulted in better operational performance; and 80% showed stock price to positively correlate with good ESG practices. Moreover, the Harvard Business Review says firms with strong ESG credentials have a greater competitive advantage, manage risk better, encourage more innovation, build customer loyalty and attract and retain better talent.

When it comes to reporting and disclosure, ESG reporting among S&P 500 companies grew by 400% in ten years. Ernst and Young’s Institutional Investor Survey 2020 revealed that 98% of institutional investors considered non-financial disclosures in their decision-making, up from around 60% in 2016. For private capital markets, over 50% of surveyed private equity firms reported that they took ESG into account for price negotiations and valuations during mergers and acquisitions.

These numbers are telling us something important. Over the next five to 10 years, companies, investors, financial institutions and governments which do not exercise robust ESG practices will not be taken seriously on the world stage. It’s time to rise to the occasion.

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What are the current ESG regulations?

What is greenwashing?

What are the benefits of sustainable practices for corporations?