Applying ESG--environmental, social and corporate governance criteria--to investing decisions is no longer a niche, it's mainstream. Many of the world's largest asset owners are now leading the sustainable investing movement, developing increasingly sophisticated approaches to integrating sustainability into their investment strategies and mandates.
In fact, many major asset owners now pursue a strategy of direct investor engagement to ensure that sustainability is a priority for the management and boards of directors of the companies they invest in.
According to the Global Sustainable Investment Review, total assets committed worldwide to sustainable and responsible investing grew significantly between 2016 and 2018. In Europe they rose 11%, to reach $14.1 trillion. The United States recorded growth of 38%, hitting $12 trillion by the start of 2018, while in Japan, sustainable investing assets grew from just 3% of total professionally managed assets to 18%.
Even those impressive numbers do not tell the full story. A recent survey conducted by Responsible Investor in collaboration with UBS found that in the pension fund space, "Corporates seem to be waking up to the necessity of taking ESG into account when making the long-term investment decisions necessary for their pension funds, and also to joining up their position on finance to corporate sustainability branding statements and commitments."
What accounts for the expanding interest? Respondents in the survey identified three major factors:
* The risks associated with not taking ESG into account.
* The positive effect on financial performance.
* Fiduciary duty.
The conviction that there are risks involved in not taking ESG into account is informed in large part by the growing threat of climate change. There are many measures of that threat.
According to the International Association of Insurance Supervisors, for example, insurance losses from severe storms were 60% higher in 2018 than in the preceding 16 years. Given the likelihood that extreme weather events will become more frequent as climate change progresses, the association has defined climate and sustainability issues as a strategic priority for the insurance industry.
A report from the consulting and advisory firm Mercer puts it even more starkly: If the planet is allowed to continue heating up, good investment opportunities will shrink significantly. The report notes that in the event that temperatures rise more than 2 degrees...