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ESGFuture of capital markets

Mainstreaming ESG in Capital Markets: Time for Industry Leadership

By October 4, 2016August 11th, 2022No Comments

To date, the sustainability and social responsibility agenda for the corporate and financial sectors has been driven largely by external stakeholders. Previously this was characterized primarily by boycotts and campaigns against business organized by activists. Today, there is a much greater focus on engaging with business, seen through multi-stakeholder initiatives such as the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB), which are focused on creating frameworks, standards and metrics for companies and investment managers to demonstrate that they are managing responsibly.

While these initiatives have played a critical role in getting environmental, social and governance (ESG) issues on the radar of companies and financial executives, the question of whether or not these are sufficient to drive integration of ESG considerations and transform capital markets remains.

The Institute’s research suggests this transformation remains nascent at best and that without greater industry leadership it will not be realized.  Despite growing interest, ESG remains very much outside the scope of mainstream investment managers’ consideration in portfolio construction.  When ESG is considered, it is usually in the context of a niche market rather than as an integrated part of fundamental analysis across asset classes.

There are a number of challenges to address to move ESG integration forward. Key among them is the lack of industry-recognized frameworks for identifying ESG factors material to financial performance. In this vein, consistent and reliable data for measuring corporate performance against these factors is also a major obstacle.  Addressing this will require leadership from finance professionals who fully understand the theories and models that drive investment decision-making.  It will require a framework for translating and separating out the signal from the noise in the over 400 sustainability regulations, guidelines, codes-of-conduct, and frameworks currently at play.  It will require a manageable and practical framework for translating ESG into the value drivers and risk and reward factors that drive investment analysis.  To catalyze this industry leadership, the Institute has launched an industry forum to identify a practical path to value for ESG in mainstream investment.  The forum is designed to be a platform for:

  • Candid conversation and peer sharing of insights on ESG integration challenges and strategies.
  • Developing an industry perspective on where the ESG integration field is headed and the value of current frameworks and metrics for ESG integration.
  • Exploration of industry-driven frameworks that can help improve comparability and consistency of ESG information material to value and accelerate integration of ESG factors into mainstream asset management and valuation systems.

Membership is restricted to industry professionals and operates under Chatam House rules. It is guided by a steering group of finance professionals and academics. If you are an investment professional interested in contributing to this framework and participating in the forum, please let us know by contacting us here. Learnings from the forum’s work will be shared on the Institute’s website.