ESG's Ecosystem of Influence

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A lack of in-depth understanding of environmental, social and governance issues among the diverse stakeholders involved in sustainable investment can trip up the sector’s progress.

The Green Horizon Summit earlier this month is evidence that environmental, social and governance (ESG) Investing is high on the agenda of business and government. More than 100 global business and climate leaders, including the Prince of Wales and United Nations secretary-general António Guterres, took part.

Business leaders, asset managers and institutional investors are already clued up on the benefits of ESG investing. Yet for sustainable investing to become mainstream, it needs the support of financial advisers, corporates and retail investors.

Figures from the Investment Association suggest the amount invested in stocks and funds with ESG characteristics could be 50 percent greater than in 2019, thanks in part to high-profile campaigns by Greta Thunberg and Sir David Attenborough.

“There has been a massive increase in interest in sustainable investing in recent years,” says Martin Shaw, chief executive of the Association of Financial Mutuals. "Consumer research indicates people are looking to support more ethical and environmentally-friendly companies.”

However, judging the appropriateness and performance of different funds is difficult unless you have an intimate knowledge of how the money is invested, he says. Even then, there is currently no universal method for classifying the green content of investments.

One of the issues, says Angela Hayes, partner at law firm TLT, is the lack of a common approach among firms in describing sustainability objectives. There are no common standards for measuring whether sustainability objectives are being met.

“Without this clear regulatory framework, retail advisers will be naturally more cautious about advising their clients to buy green investment products,” she says. More standard language and metrics would also help retail investors to learn, understand and make decisions about the products available.

Indeed, one of the sticking points for the wide-scale adoption of sustainable investing is having a meaningful definition, says Jeff Waller, senior director and head of financing solutions at sustainability consultancy ENGIE Impact.

gradient-quote Investments that are labeled 'sustainable' fall along a wide spectrum. An investment can be deemed sustainable if it simply screens out companies that don’t meet a minimum threshold of ESG factors, like those in the tobacco and weapons sectors. gradient-quote-right
Jeff Waller, Senior Director and Head of Financing Solutions, ENGIE Impact

One solution might be to create market-accepted guidelines, such as those for green, social and sustainability bonds.

gradient-quote If the rest of the industry adopted similar frameworks across the sustainable investing landscape, it could bring a level of transparency that could help the market grow. gradient-quote-right
Jeff Waller, Senior Director and Head of Financing Solutions, ENGIE Impact

A poll of 200 UK independent financial advisers (IFAs) by the international business of Federated Hermes found that 82 per cent reported an uptick in inquiries from investors about how their capital can be committed to combat the effects of climate change, raise governance standards and improve human rights.

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