Sustainable investing may seem like a passing trend, but data show that more investors are seriously examining environmental, social and governance (ESG) factors when deciding where to put their investment dollars. That’s because ESG influences – climate change, poverty, population shifts – will define the future and the financial market landscape.
However, as investors search for investment opportunities, they are facing a need for greater data access in order to understand how ESG-related risks are assessed, priced, and managed. In fact, such information is critical for investors to make informed decisions. Without it, they very well could make a costly mistake such as investing millions in a company that failed to disclose it owns contaminated land.
What kind of information is lacking? A February 2019 report from World Resources Institute cites incomplete data, inconsistence reporting metrics, weak disclosures, and questionable validity. “Most investors believe that companies don’t disclose ESG risks that could affect their business,” the Harvard Law School Forum on Corporate Governance and Financial Regulation reported in 2017. That’s still relevant in 2019 as investors often have to seek this information from company executives.
Inconsistent reporting metrics also is an ongoing complaint from investors. Sustainability reporting is voluntary, and a company doesn’t have to disclose anything concerning ESG. However, investors want, and need, to know. Because of this, investors find it harder to compare companies and, in turn, invest. A 2017 Harvard Business School Working Paper stated, “Lack of comparability due to the lack of reporting standards is the primary impediment to the use of ESG information.”
Even when data is presented, investors still question much of it. Many companies believe they should only offer a limited amount of information about sustainability or give investors “boilerplate language” instead of metrics on actual environmental concerns like water consumption. Such tepid disclosures do not help investors make decisions.
Ultimately, investors are seeking more validity and transparency, and they expect more from companies. Realizing this need, many global companies are making impressive strides to include ESG in many aspects of their businesses including reports.
Transparency and data are so important to major investors that they have asked the Securities and Exchange Commission to force companies to have ESG-related reporting requirements. So far, the SEC isn’t buying into the investors’ desires.
Still, companies are realizing that talking openly about ESG issues is a smart move. A Governance & Accountability Institute’s (G&A) research team recently reported that sustainability reports jumped drastically from 2011 to 2018. In 2011, about 20% of companies published reports. In 2018, 86% reported on sustainability.
That’s good news for investors, many who believe companies do not adequately disclose ESG risks. An Oxford University recent study found that more than 80% of mainstream investors now consider ‘ESG’ information when making investment decisions.
As companies disclose more ESG data, investors are hungry for more data and will purchase it at any costs. Capital markets consultants Opimas predicts that the cost of buying ESG data will rise to about $750 million next year, an increase of 300% since 2014.
Additionally, organizations and groups like the Task Force on Climate-related Financial Disclosures (TCFD), the Sustainability Accounting Standards Board, CDP and Global Reporting Initiative are pushing to create standardization of producing and using ESG disclosures.
Investors who doubt that the ESG trend will continue its current trajectory would be wise to cast aside those misgivings. Sustainability issues have entered into the financial market landscape for the long-term.