Environmental, social, and governance (ESG) considerations are included in investment processes and decisions. ESG variables span a broad range of topics that aren’t normally considered in financial analysis but may be. This includes how firms react to climate change and water management, how they manage supply chains, how they treat workers, and whether they have a corporate culture that fosters trust and innovation.
Many investors recognize that ESG information about corporations is vital to understand corporate purpose, strategy and management quality of companies. It is now, quite literally, big business. But what explains the remarkable rise of ESG investing and what does this mean for the future?
The market for ESG information is maturing and quality, while still imperfect, is getting better all the time. 80% of the world’s largest corporations use GRI standards for corporate sustainability reporting. New technology based on machine learning and big data can already unlock valuable insights.
The rise of ESG investing can also be understood as a proxy for how markets and societies are changing. The big challenge for most corporations is to adapt to a new environment that favors smarter, cleaner and healthier products and services. For investors, ESG data is increasingly important to identify those companies that are well positioned for the future. And for policy makers, it should be a welcome development that ensures that the common good does not get lost in short-term profit making at any cost.
Today, ESG investing has matured to the point where it can greatly accelerate market transformation for the better. As corporations and investors experience growing influence and power, their actions and decisions increasingly shape the future. Provided that political framework conditions based on openness and global rules do not deteriorate further, market-led changes will act as a force for good on a truly massive scale.
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