The measurement of environmental, social and governance (ESG) and sustainable investment: Developing a sustainable new world for financial services

Abstract

The author of this paper was inspired by an article published in The Economist on 21st September, 2017: ‘Ethical Investment Is Booming. But What Is It?’ with a subheading ‘ESG Investment Is Hard to Define and Its Returns Are Hard to Measure’ and a telling conclusion that environmental, social and governance’s (ESG) terms are being redefined to ‘help replace feel-good bromides with crunchier measures’. Many investment firms have continued to examine which of the nonfinancial ESG factors and measures have most relevance to financial investment and are integrating those into the investment management process, in order to align their financial products towards delivering tangible sustainable outcomes. At the same time, the United Nations is striving towards constraining global warming to below 2°C above pre-industrial levels and forging new initiatives, such as convening the Global Investors for Sustainable Development (GISD) Alliance, which ‘is aimed at leveraging the insights of private sector leaders to remove impediments and implement solutions for mobilizing resources for sustainable development’. This paper examines the ESG data and analysis that is available today, along with some challenges and risks that have been identified and aims to set out how it can be used for measurement of ESG. It also outlines the types of new initiatives that are intended to help deliver a common language for ESG with agreed industry-wide definitions, which could be used to measure the tangible delivery of the necessary sustainable outcomes across the wider global investment process.