Is ESG Investing Poised to Take Another Giant Leap Forward?

The electronics giant Samsung announced in late February that it was redoubling its efforts toward environmental, social, and governance (ESG) initiatives, offering one more piece of evidence of just how seriously corporate sustainability, and ESG investing, are now regarded.

Indeed, Samsung’s mission, as stated by Executive Vice President Jaeho Shin, is to “further evolve into a global company that earns trust from our customers and members of society, and that dedicates to the development and happiness of humanity.” Doing so is “no longer optional” according to a February 22 note issued by Goldman Sachs, which cited European regulations and the ESG advocacy of the new U.S. president, Joseph R. Biden, as the primary reasons for the uptick.

But even before Biden took office or those regulations took shape, ESG had taken center stage. A study by the Chartered Financial Analyst (CFA) Institute showed that in 2020, 85 percent of that organization’s members took ESG into consideration and that 65 percent of their clients demanded that they do so.

Moreover, nine of every 10 investment professionals believe that going forward, their firms will delve more deeply into ESG, though that contrasts markedly with the number of institutional and retail investors who actually consider ESG investing. Those respective numbers stand at 19 percent and 10 percent, according to the survey.

One of the primary issues affecting ESG investing is those businesses that engage in “greenwashing,” whereby they portray their products as being more environmentally compliant than they might actually be. That speaks to one of the primary concerns surrounding surging interest in ESG investing: a lack of consistent, reliable data to measure such compliance. Fully 78 percent of those responding to the CFA survey pointed out a need for uniform standards.

In fact, the report concluded, enterprises are often “left to determine for themselves which ESG factors are material to their business performance and what information to disclose to investors.” An example would be the Morgan Stanley Composite Index (MSCI), which measures companies’ commitment to various environmental and social initiatives, as well as corporate governance.

As mentioned, there is every expectation that the Biden administration will address the issue of uniformity -- that in particular, the appointment of Gary Gensler as head of the Securities and Exchange Commission will change the landscape. As an advisor to Senator Paul Sarbanes, he helped draft the Sarbanes-Oxley Act of 2002, which called for managerial oversight of companies’ financial reporting on the part of business leaders, and severe penalties for those CEOs who failed to comply.

The expectation is that similar standards will be applied to ESG disclosure. In addition, the asset manager BlackRock, besides issuing a request to companies to reveal their plans for going net-zero, is banding together with State Street and Vanguard to encourage enterprises to abide by the reporting standards set forth by the Sustainability Accounting Standards Board (SASB), a nonprofit organization formed in 2011 with such transparency in mind.

In the private sector, multiple companies have attempted to introduce data-driven ESG analytics to analyze companies and portfolios. Some, like investment bank Schroder’s, which has built SustainEx, rely on in-house tools. Others, like New York-based Vestive, are providing third-party tools to attempt to provide greater clarity for investors.

In addition, Nasdaq is mulling an amendment that would require companies to make diversity disclosures - specifically, as it pertains to directors - part of its listing standards, as such social concerns were brought to the forefront by the Black Lives Matter movement in 2020.

Finally, the International Financial Reporting Standards (IFRS) Trustees announced in February that it is moving forward with the idea of forming a new board that would establish global ESG reporting standards, in hopes of a proposal being finalized in September and the board’s formation being announced at the United Nations Climate Change Conference in November.

In the meantime, companies can expect continued pressure from stakeholders and investors regarding ESG, as was the case in 2020 when major oil companies were challenged to meet emissions targets. As BlackRock chairman Larry Fink noted in a January 2021 letter to CEOs, “There is no company whose business model won’t be profoundly affected by a transition to a net-zero economy” by 2050. As a result, Fink added, it would behoove businesses to formulate a “well-articulated long-term strategy” that moves the company toward this goal while assuaging investors.

Climate initiatives have long been front and center and will understandably remain so. But the other facets of ESG investing will likewise continue to demand attention, as will the ongoing quest to establish uniform reporting standards. The latter is of particular importance, as that will ensure transparency and adherence to the larger goals of ESG.

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