ESG Trends August 2021: What’s Hot and What’s Not?

Environmental, Social, and Governance are the three areas of ESG trending interest or categories for socially responsible investors. They are the three key factors considered when measuring the ethical impact and sustainability of an investment made in a company or a business. These investors have deemed it important to include their values and concerns into their investment choice rather than the consideration of only the profit or risk that the opportunity presents.

So these socially responsible investors check out companies they want to invest in using the ESG criteria to screen their investments. The ESG criteria are sets of standards that govern the operation of a company. These criteria include:

• The Environmental criteria may include the contribution of a government or company to climate change via emission of greenhouse gas alongside energy efficiency and waste management. This has become more important given the renewed efforts to fight global warming. The Environmental criteria can also be employed to evaluate environmental risks faced by a company and how they manage them. 
• The Social factors include human rights, exposure to illegal child labor, adherence to workplace health and safety, labor standards in the supply chain. In addition, the social score of a company increases if they are well integrated with their local community and has a social license to carry out operations with consent. 
• In terms of governance, these are the set of rules that define the rights, expectations, and responsibilities of the stakeholders in the governance of corporations. The investors would want to know that the accounting methods employed by the company are transparent and accurate and that stakeholders will have the chance to vote on important matters. They would also like an assurance that the company does not engage in illegal activities. 

What’s Trending in ESG? 

One of the things to consider here is the supplier’s ESG risks. The companies are to perform due diligence on all their suppliers in terms of sustainability and human rights. The process of measuring, analyzing, and then reporting a company’s social and environmental impacts is known as sustainability accounting. The company provides much of the information used to access a firm’s sustainability, and they are not always audited.

Third-party organizations make use of the information provided by the company to create different assessments and ratings. In terms of human rights, the issues of fair employment, health and safety, no environmental degradation, and local rights of communities are some of the specific topics that should be accessed as part of ESG activities when investing in projects and companies. The investee’s supply chain should also be looked at as there could be some profound issues concerning human rights. 

Another thing is that more Private Equity firms are automating ESG data collection from their portfolio companies. Sourcing for the right information is one of the challenges that Private Equity firms face, alongside a comprehensive and clear method to include the metrics of ESG criteria into their strategy. The volume of data can swamp portfolio managers attempting to understand the best way to have the data result in meaningful and actionable insights. When portfolio monitoring technologies are combined and supported by managed services for data collection, this process’s pressure can be eased. The challenge of gathering the data can make you understand why firms are gravitating towards an automated process. 

What’s Not Trending in ESG?

One thing to consider here is the Task Force for Climate-Related Financial Disclosure (TCFD). The TCFD in 2017 published recommendations for voluntary and consistent financial risk disclosures related to climate in mainstream fillings. Although the TCFD fits together with the ESG in terms of traditional risks that cover reputation, policy, technology, culture, and the identification of how a company can be affected, the TCFD seems to be overshadowed by other frameworks such as the EU SFDR. Companies also find it difficult and quite expensive to carry out climate risk analysis as there are no set standards for climate risk modeling. 

Another thing to consider here is the performance of ESG portfolio stock last year and this year. According to a report by S&P Global, large funds with the environmental, social, and governance criteria outperformed the broader market during the first year of the pandemic. The analysis included more than $250 million in assets under the management of 26 ESG exchange-traded funds and mutual funds. Between March 5, 202 and March 5, 2021, 19 of those funds grew between 27.3 and 55 percent. ESG investing has often been criticized as not being able to maximize returns. Still, this latest analysis shows that the funds outperformed their counterparts in the broader market during the pandemic. However, this year, they are not making such good movements and performance as they did last year. 

We should also consider that investment firms that are not using ESG looking for alphas are not so trending right now. ESG alphas are firms that make use of the ESG criteria and outperformed their expected returns having excess. There is a belief that ESG is a source of alpha and can lead to positive portfolio performance. Despite this, there aren’t many investment firms not using ESG looking for alphas. 

Conclusion

Last year, ESG had many investing advantages due to its outperformance, but this year it is not as advantageous as it was previously.