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Future of capital marketsSustainability

What will it take to move ESG from the margins to the mainstream in capital markets?

By October 29, 2015No Comments

Judging from the $59 trillion in assets under management now committed to the UN Principle for Responsible Investment (UNPRI) and rapid growth of socially responsible investment funds, it would be easy to conclude we are well on the way to integrating sustainability or ESG into mainstream capital markets.

A deeper look suggests a different story. Over the past year, the High Meadows Institute has been conducting research to understand the reality of how the mainstream institutions that shape capital markets approach sustainability. We have published a report on our findings available here.

Our research shows that while many of the leading institutions talk about their commitment to sustainability, there is very little hard information on how they actually deliver against their sustainability commitments. Only 5 out of 25 top asset owners disclose how ESG factors are integrated in their investment strategy while 16 of the top 25 asset managers provide some form of disclosure.  Importantly, only 2 of 10 of the top consultancies that play a key role in advising asset owners disclose their approach to sustainability.

Furthermore, as the graph below illustrates, our survey shows that asset owners, asset managers and companies often have very different definitions what ESG factors are material to investment performance and decision-making, and there is no agreement on standards for communicating performance against them.

ESG Metrics

In late September, the Institute, with the support of George Serafeim, professor of management at the Harvard Business School and Institute board member, brought together corporate responsibility and sustainability experts from mainstream capital market institutions to review our research and discuss what is now required if we expect ESG to be fully integrated across capital markets. The group concluded that despite some progress, we need a fundamental paradigm shift in the way the impact of ESG on organizational and financial performance is perceived, communicated and understood if we are to achieve true ESG integration. The group identified a number of data gathering, reporting and organizational issues that must be addressed to change the existing paradigm. These issues centered around two central, interrelated challenges.

  • Changing the narrative around ESG from a cost to a narrative that sees ESG integration as a value driver.
  • Dramatically improving the signal to noise ratio in ESG by engaging asset owners, managers and companies in defining the factors material to performance and industry standards for reporting on them.

To address these challenges effectively, there was broad agreement that while multi-stakeholder initiatives such as SASB are important steps in narrowing the ESG factors that are material to performance by industry, the next step in changing the narrative and integrating ESG data as a value driver in mainstream finance has to be driven by leaders from within the industry.

As one participant summarized, if we are going to close the last mile on ESG integration we need to create resources that put ESG information in a form where portfolio managers can see and own the ESG value creation narrative. Clearly this task can best be addressed by those within the industry with the intimate knowledge of the systems and culture that drive behavior.

At the High Meadows Institute we are going to continue the conversation with key industry leaders on how this can best be facilitated and will report on our findings. We welcome your thoughts on our research and conclusions.