The next wave of environmental, social and corporate governance

Environmental, social, and governance (ESG) investing has been in a state of unrelenting change since the term was coined back in 2004 and the first wave of ESG products hit the market.

 

However, the fate of ESG disclosure is coming into focus with a pending European Union (EU) regulatory regime, a new Sustainability Standards Board being proposed by International Financing Reporting Standards, and investors coalescing around standards, such as those of the Value Reporting Foundation. Before long, the majority of public companies will face some kind of ESG disclosure standards.

 

As ESG disclosures for publicly listed companies are formalised, the market will turn its attention to private companies and asset classes where ESG plays a key role but is difficult to assess. According to McKinsey, private markets have grown 2.7-fold since 2010 and are worth more than $6.5 trillion. The growth comes in part from institutions turning to alternative assets to chase higher returns. For example, in 2019, alternative invest­ments made up 29 and 53 per cent of endowment and pension portfolios respectively, according to Morgan Stanley.

 

These same institutions are weaving ESG into investment processes, both to satisfy regulators and to meet client demand – 70 per cent of investors surveyed by EY said that alternative managers’ ESG policies are critically important. This institutional systematic approach demands ESG data for alternative investments alongside equities.

 

Additionally, having private company data enables the supply chains of public companies to be assessed comprehensively. To assess ESG risks and opportunities for public companies, investors need to analyse customers, suppliers and partners, public and private alike.

 

Although some private compa­nies publish ESG data, disclosure mechanisms don’t compare with public requirements. However, recent technological advances including artificial intelligence, natural-language processing, sat­ellites and sensors, mean that some ESG data can be collected without company disclosure.

 

As ESG data becomes standard­ised and commoditised for public companies, look for the next wave to rely heavily on new technologies that give private companies and other asset classes the same attention and scrutiny.

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