Global Standardization Will Be Key to Growth of ESG Strategies

The widespread proliferation of environmental, social and governance investments will require global data standards and regulations to further progress.

According to the Organisation for Economic Co-operation and Development’s latest 2020 business and finance outlook report, Sustainable and Resilient Finance, ESG scoring and reporting has the potential to unlock a significant amount of information on the management and resilience of companies, but it will require agreed global data standards and regulations, Forbes reports.

While over $30 trillion has flowed into sustainable investments in some form of ESG investing, over 25% of publicly listed companies around the world are ESG measured and rated, with most companies in the U.S.

The OECD’s analysis underscores the distribution of performance in ESG ratings by different Providers for the same companies across all sectors.

“The use of ESG analysis is fast becoming one of the main tools for investors to manage all kinds of non-financial risks, from carbon exposures to human rights violations. The current ESG practices are falling short in giving the market the information it needs to properly price such risks – essentially, we have a market failure,” Greg Medcraft, Director, Directorate of Enterprise and Financial Affairs, OECD, said.

Give the breadth of various ESG indices, regulators and policy makers are concerned that companies will embark on “rating shopping” tours to pick the ESG index provider for an index that best suits their ESG narrative.

“We need a global, mandated, auditable ESG data reporting framework – a minimum set of data points to track and compare ESG performance. Voluntary industry standards will not address these issues,” Medcraft added.

The growth of the ESG may be associated with more people investing with their core values. Three-quarters of global individual investors and 71% in the U.S. noted that it is important to align investments with their values and ethics.

While there is a feel-good component to the category, ESG or sustainable investments may also enhance a long-term portfolio. For example, Dr. Margaret Towle, an ESG investing specialist, found that growth of intangible assets on company balance sheets can play an important role.

“In 1975, tangible assets such as real estate and equipment represented 83 percent of the value of the S&P 500, and intangible assets represented only 17 percent of the value of the S&P 500. Today, the situation is reversed, with intangible assets representing 84 percent of the value of the S&P 500 and tangible assets representing only 16 percent of the value of the S&P 500. In fact, the value of intangible assets is five times greater than tangible assets for most industries,” Towle said in the paper, ESG Investing, Myths Versus Reality.