(ESG) Environmental, Social, Governance Investing & Analysis

ESG Investing

An ESG-compliant portfolio is riding on the boom. ESG stands for Environmental, Social, and Governance. Funds whose asset allocation mostly includes shares and/or bonds of companies that are evaluated based on Environmental, Social, and Governance factors are called ESG Funds.

Investors are increasingly approaching such moral factors as part of their analysis to identify material risks and growth opportunities. Financial reporting don’t mandatorily require ESG metrics, still, companies are enormously making disclosures in their annual and sustainability report.

ESG investing came into the limelight in January 2004, when then UN Secretary-General Kofi Annan invited CEOs of major financial institutions to take part in a joint initiative to facilitate the incorporation of ESG into capital markets under the guidance of the UN Global Compact.

There is no predefined approach for the calculation of different ESG metrics. A variety of analytical approaches and data sources can be applied by the investors to address ESG considerations. Institutional investors were reluctant to accept the thought, arguing that their guardian duty was limited to maximizing shareholders’ values irrespective of environmental or social impacts, or broader governance. Another prime barrier was a lack of data and the important tools to get the whole information. 

ESG investing has been coined out of Socially Responsible Investing with key differences. ESG investing and analysis focuses on finding value in companies instead of supporting a set of values. Today, over 85% of the world’s largest corporations use Global Reporting Initiatives standards. 

Market disruptions and uncertainties post-pandemic moved investors to ESG funds. In the first three months of 2020, investors globally invested $54.6 Billion in these funds. And expected to reach $50 trillion, from $37.8 trillion by year-end.

Europe accounts for 50% of the total global ESG assets, the U.S. has the strongest expansion this year and may hold a main stage in the category starting in 2022. The next wave of growth could come from Asia with a major focus on Japan.

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