WILL ESG REPORTING = ESG INVESTING?

Posted by FlexShares on Apr 11, 2018 8:00:00 AM

WillESGReportingESGInvesting_Original

Will the convergence of economic moral value equal ESG investing?

Environmental, social and governance (ESG) development continues to garner substantial global attention from regulators, non-governmental organizations and investors.

According to a 2017 SSGA survey, 80 percent of institutional investors indicated that they now use some form of an ESG strategy for their portfolios. The survey found that in 2016 strategies that focused on some form of ESG approach comprised $8.1 trillion of the approximately $40.3 trillion in assets professionally managed in the U.S. – nearly double the amount just two years earlier.1

CONVERGENCE OF ECONOMIC VALUE & MORAL VALUE

For both fund managers and private investors, deciding whether or not to invest in a particular fund or company now often involves a detailed analysis of ESG data. But a lack of uniform reporting standards has made it difficult for investors to effectively evaluate the data. For example, only eight percent of respondents to a PwC survey said that the ESG data disclosed by the companies they invest in allowed them to be compared against other companies.2

Currently corporate disclosure requirements provide limited data on ESG-related risks and opportunities. Additionally, a firm may release ESG-related disclosures at a different time or through a less accessible method than they release their financial data, making integration into investing decisions more difficult.

THE CHANGING REPORTING LANDSCAPE

Several efforts have been made to address the inconsistencies in reporting and the need for coordination and consolidation. In 2015, a global network of thousands of investment firms and professional service providers adopted the United Nations-supported Principles for Responsible Investment (PRI).3 PRI calls for more integration, disclosure and transparency in investment analysis of companies.

Other attempts to develop principles and standards for ESG investing have included the UN Global Compact, Equator Principles, the Organization for Economic Co-operation and Development, Guidelines for Multinational Enterprises, SA 8000 (auditable standards for workplaces) and ISO 26000 (guidance on operating in a socially responsible way.) In March 2017, NASDAQ published an ESG Reporting Guide for European markets outlining 33 ESG-related metrics that reflect company vitality and operating behavior.4 Several public policy organizations are also working to promote ESG investment considerations.

CURRENT REPORTING TOOLS

This wide array of organizations may eventually succeed in standardizing how non-financial data is presented for investment purposes. Creation of a uniform standard, however, has thus far proved to be difficult. Still, ESG investors can use the frameworks that have been adopted already, such as SA 8000, in researching firms and funds.

We believe that in the future, all companies will be required to move to a consistent reporting framework and companies that have embraced a robust environmental, social and governance culture will be rewarded by increased investor confidence and positive market outcomes.

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Unless otherwise noted, all opinions expressed in this post are those of the author and do not necessarily represent the views of Northern Trust. Information contained herein is current as of the date appearing only and is subject to change without notice.

Past performance is no guarantee of future results. It is not possible to invest directly in any index and index performance returns do not reflect any management fees, transaction costs or expenses.

Before investing, carefully consider the FlexShares investment objectives, risks, charges and expenses. This and other information is in the prospectus and a summary prospectus, copies of which may be obtained by visiting www.flexshares.com. Read the prospectus carefully before you invest. Foreside Fund Services, LLC, distributor.

An investment in FlexShares is subject to numerous risks, including possible loss of principal. Fund returns may not match the return of the respective indexes. The Funds are subject to the following principal risks: asset class; commodity; concentration; counterparty; currency; derivatives; dividend; emerging markets; equity securities; fluctuation of yield; foreign securities; geographic; income; industry concentration; inflation-protected securities; infrastructure-related companies; interest rate / maturity risk; issuer; large cap; management; market; market trading; mid cap stock; MLP; momentum; natural resources; new funds; non-diversification; passive investment; privatization; small cap stock; tracking error; value investing; and volatility risk. A full description of risks is in the prospectus.

End Notes

  1. 1. Cheng, Evelyn. CNBC. "Some on Wall Street are Making a New Bet on Investors’ Consciences." 17March2017.
  2. 2. Loop, Paula & Sara DeSmith. PWC. "PwCs 2016 ESG Pulse." 2016.
  3. 3. Principles for Responsible Investment. "Annual Report 2017." January 2017.
  4. 4. Rosendahl, Lauri. Nasdaq. "ESG Reporting Guide." 23March2017.
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