Nearly two centuries ago, gold rejecters in California amassed the greatest wealth in history.
Proponents of fund managers seeking socially conscious investments will similarly discover that environmental, social and administrative (ESG) insights can generate wealth in the form of alternative data that promises big payments – only if they know how to create it. There may be some truth in that line of thought if you take some statements and ads out of the equation.
First, let’s be clear: ESG is not on the border. The European Union has enacted new financial regulations through the Sustainable Finance Disclosure Regulation (SFDR). These improve ESG disclosure and consideration and help to invest directly in products and companies that benefit humans and the planet.
As we write, the US Securities and Exchange Commission is also considering drafting and enforcing ESG-related regulations. Implemented or currently under consideration, these rules encourage fund managers to integrate sustainable risks into their business processes, report on them publicly, stamp green washing, and promote transparency and knowledge among investors. Accordingly, it will also become easier to compare the sustainability efforts of firms, allowing stakeholders to make more significant decisions from all angles.
The inclusion of ESG components in investment strategies is certainly not new. The world’s largest asset managers have been practicing it for years. According to the Institute for Governance and Accountability, 90% of companies listed on the S&P 500 now produce sustainable reports, up 70 percent from more than a decade ago. Yet some are wailing about adopting the ESG investment mentality; they see ESG as a nuisance that detracts from their high-income mission. But does this mentality mean they have lost important opportunities?
Waiting for new mandatory ESG reporting and compliance framework standards in the United States has put American-centric managers at a significant disadvantage.
Fund managers today will be able to gain insights from alternative data from climate change, natural disasters, harassment and discrimination lawsuits and other information that can be mined and from ESG-related data.