Sustainability, ESG, and the Future of Investing: A Review

Posted in: Best of, Value Drivers, Economics, Equity Investments, Futures, Performance Measurement and Evaluation, Philosophy, Portfolio Management, Risk Management, Standards, Ethics and Regulations (SER)

mark Entrepreneurial investor’s 10th anniversary, we’ve compiled retrospectives of our coverage of the most critical topics in finance and investing over the past decade.

The last 10 years have witnessed a sharp acceleration in the trend towards sustainability in investment management and the adoption of environmental, social and governance (ESG) factors in financial analysis.

Since its launch in 2011, Entrepreneurial investor has tracked this trend and provided investment professionals with critical insights into developments shaping investment sustainability.

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ESG investing has been around in one form or another for much of the last 75 years, but only in the last decade has it reached critical mass.

This development reflects a confluence of factors. Chief among these is the increased demand from end investors, including institutional asset owners and retail investors, for investment products and solutions that take into account ESG risks and opportunities. Investors have also expressed a desire for investments that align with certain environmental or social goals, so-called non-pecuniary goals. Governments and regulators have also put pressure on the investment industry to contribute to broader sustainability-oriented policy goals.

Together, these factors have led to rapid growth in the development of ESG-related financial products. The next chart from Generation Investment Management’s Sustainability Trends Report 2021 illustrates this pattern:

Trends in finance related to sustainability, 2015–2020

Chart showing trends in finance related to sustainability, 2015-2020
Sources: CB Insights; Bloomberg; BNEF; Reuters; FTSE Russell; generation

ESG coverage activated Entrepreneurial investor largely reflects these developments. Since NO’Launched in fall 2011, a total of 220 ESG-related articles have been published, three-quarters of them since 2016. These publications address all types of ESG issues, including accounting and disclosure standards, the discussion of fiduciary duties, the relationship between ESG and investment performance, thematic investments, water quality and human rights issues, gender lens investments and many more.

ESG focused articles from Entrepreneurial investorPer Year

Chart showing ESG-focused articles on entrepreneurial investors, by year
Source: Entrepreneurial investor

What follows is a hand-picked selection of the most relevant insights and thought-provoking commentary on all things ESG during this period. We show key sustainability issues through the perspectives of both proponents and critics of ESG. The collection provides a fascinating window into the ESG debate and orients readers to the emerging sustainability trend and its implications for the future of investing.

A framework to drive ESG financial discipline

Kevin Prall, CFA, describes a structural basis for analyzing how ESG affects the value creation of intangible assets and discusses how focusing on intangible value creation can bring more financial discipline to ESG investments.

ESG issues: global trends and transitions

Aline Reichenberg Gustafsson, CFA, and Barbara Stewart, CFA, discuss sustainability and the growing importance of women in the investment ecosystem, with an emphasis on the Nordic perspective.

The ESG Performance Paradox

Jordan N. Boslego, CFA, says that without strong fiduciary standards, ESG can become an excuse for fund managers to underperform and charge higher fees.

File for the future of sustainability in investment management

Thematic Reversal: Thematically Wrong?

Nicolas Rabener examines the merits of thematic investing and how its performance compares to established benchmarks. He concludes that “ESG and similar issues are forms of investment based on personal preferences. They may come at a cost, but they achieve some non-financial goals.”

The ESG debate heats up: four more challenges

What are the main areas of concern in the ESG world? Christopher K. Merker, PhD, CFA, examines the challenges around standards, greenwashing in investment products, and the urgency of climate change.

ESG Investing: Can You Have Your Cake and Eat It Too?

Do companies with high ESG ratings outperform their lower-ranked counterparts? Gautam Dhingra, PhD, CFA, and Christopher J. Olson, CFA, share their analysis.

ESG Investing: Too Good To Be True?

Nicolas Rabener says the idea that companies that care about the environment, take care of their employees and exhibit good governance are likely to outperform is a mirage.

Beyond Carbon: Water Risks and Sustainable Investment

The water crisis in Cape Town, South Africa, shows that carbon emissions and climate change are not the only threats to sustainability, says Monika Freyman, CFA. Water concerns are already affecting investors’ bottom lines, as well as future risks to their bottom lines.

Journal of financial analysts Current number mosaic

Human rights issues and your portfolio: the risks and opportunities

What are the risks and opportunities associated with integrating or not integrating human rights issues into asset allocation considerations? Anjali Pradhan, CFA, explores the topic.

Sustainable investment and fiduciary responsibility: conflict or confluence?

Usman Hayat, CFA, interviews David Blood, co-founder of Generation Investment Management, who studies the sustainable investment trend and discusses why sustainability is integral to fiduciary duty.

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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.

Image credit: ©Getty Images / Bloomberg Creative

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Rhodri Preece, CFA

Rhodri Preece, CFA, is CFA Institute’s Senior Head of Research and is responsible for leading the organization’s global research and publishing activities, managing research staff and collaborating with leading investment practitioners and academics. CFA Institute produces the highest caliber research on issues and topics most relevant to the investment industry, including rigorous in-depth research, forward-thinking leadership content, applied investment insights and commentary on current investment. Preece previously served as Head of EMEA Capital Markets Policy at CFA Institute, where he was responsible for leading capital markets policy activities in the EMEA region, including content development and political participation. Preece is a current member of the PRI Academic Network Advisory Committee and a former member, from 2014 to 2018, of the Economic and Market Analysis Committee of the European Securities and Markets Authority’s (ESMA) Group of Economic Advisers ). Prior to joining the CFA Institute, Preece was a manager at PricewaterhouseCoopers LLP in the mutual funds group from 2002 to 2008. He holds a BA and MA in Economics and has been a CFA charter holder since 2006.

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