With chaos and tumult defining the news across the board, it's inevitable that major changes are roiling the socially responsible investment industry, with major implications for investors and public companies alike.
In the midst of this disruption, there are some definite clues to the future in Sustainalytics' fourth annual "10 for . . ." report, but its findings require thoughtful reading to properly assess the considerable insights.
In "10 for 2018," the independent corporate governance research firm issues a number of warnings along with its usual "upside" conclusions. While the report underlines that risk can also create opportunity, the threats it identifies in the coming year are significant ones. The bottom line is, that while major advances are being made in several areas of corporate practices and strategies regarding environmental, social, and governance (ESG) issues, investors will need to pay close attention to rapidly changing developments to ensure profits from this progress.
On the upside, Sustainalytics finds that ESG-driven investing will continue to increase in 2018. Global responsible investing now totals $23 trillion, a rise of 25 percent since 2014, according to the Global Sustainable Investment Alliance. To add to this inflow of “sustainable” capital, the global green bond market is estimated to reach $250-300 billion in 2018, up from $155 billion in 2017.
The rapid growth and large sums are a result of more widespread adoption of integrating ESG factors into decision-making, explains Sustainalytics CEO Michael Jantzi. “Investors are addressing the risks posed by climate change, pressing to make the workplace more diverse throughout the ranks, and encouraging transparency and innovation in the way business is performed . . .. Investors increasingly recognize that ESG considerations are part of their fiduciary duty as long-term stewards of capital.”
Jantzi cautions that this growth is accompanied by “profound” changes taking place in the asset management world. They include “the ongoing shift from active to passive management, the move from fundamental to data-driven strategies, and the increasing use of machine learning and artificial intelligence.” These changes will place “new demands on ESG research and data, and raise expectation for production innovation.”
As if these changes in traditional models and practices were not enough disruption, “10 for 2018” outlines 10 specific ESG risks for 10 sectors, from mining and chemicals to real estate and apparel. They include water management at a time of increasing scarcity, the ongoing challenge of climate change, new regulatory and legal constraints, and increasing demands from stakeholders for better governance.
As in previous “10 for . . .” reports, 10 companies are analyzed and measured in case studies for their exposure to risk. The report also looks back at the progress (or lack of it) made by the 10 companies examined in the 2017 report.
This year’s report displays a sobering shift in focus, from the exercises' previous emphasis on potential profit-making innovations to an in-depth examination of ESG risks to shareholder value. But it is also a milestone in the maturity of the responsible investment market: a reminder that major progress does not come free of equally significant challenges.
John Howell, Chief of Thought Leadership and Editorial Director, is a co-founder of 3BL Media, the parent company of Triple Pundit, begun in 2009. Howell oversees original editorial content procurement and creation. He is also the author of the weekly Brands Taking Stands Newsletter. He has written and edited for Elle, Artforum, High Times, the New York Times Magazine, and the LA Times. Howell is based in Wonalancet, NH.