Sustainable investing has gained significant momentum as a critical investor consideration. Growth of ESG has corresponded to an increase in investor ESG awareness, greater corporate reporting of non-financial ESG measures, and demonstrated outperformance from ESG strategies. According to a recent report from BNY Melon, the continued growth of ESG is dependent on investors, corporations and governments improving the ESG framework.
The report notes that the ESG investments in 2016 exceeded $22.8 trillion, a 12% increase from the prior year. In addition, more than half of the investments are in Europe. The scope and breadth of the ESG market requires a global approach to addressing shortcomings.
To that end, a global framework of rules, disclosures, and screening has emerging to help investors. This framework facilitates measurement and comparison of nonfinancial performance. The report cites measurability and comparability of non-financial performance as the biggest hurdles to ESG investment growth.
The basis of EGS rules is the UN Sustainable Development Goals. Further, in March 2018, the European Commission created an action plan, “Financing Sustainable Growth” to establish a classification system for sustainable activities and create standards and labels for green financial products. In addition, asset managers and service providers are helping institutions incorporate ESG into increasingly sophisticated investment strategies.
As ESG metrics and definitions improve, corporations and other issuers will be better able to provide transparency into nonfinancial performance. Improved disclosure, in turn, allows asset managers and other service providers to better assess and compare ESG results and design products and strategies with greater precision. Only then will investors be able to evaluate the success of their ESG strategy from both financial and impact priorities.
The future of ESG envisioned by the BNY Melon report is in many ways available today through direct investments. Since its inception, Windmill Capital Management has reported the social impact of its renewable and alternative energy projects. Even if investors are not focused explicitly on ESG, investment materials include environmental data such as the amount of carbon dioxide removed from the environment, and social data such as the number of jobs created. Furthermore, renewable energy direct investments are unencumbered by other activities that might dilute their positive impact. Finally, direct ESG investments generate substantial excess risk adjusted returns.
Quite simply, there are no ESG trade-offs when making direct investments in renewable and alternative energy projects. So while markets evolve to accommodate future growth in ESG invested capital, direct investments today provide a clear path for thoughtful investors to pursue environmental and societal priorities.