ESG & Sustainability

The Mainstreaming of ESG Investing in the Decisive Decade for Climate: An FTI Consulting Report September 2021

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Global institutional investors are doubling down on ESG as policymakers and regulators strengthen disclosure requirements according to new research from FTI Consulting.

Environmental, social and governance (ESG) investments are booming. According to research from Bank of America, global assets under management in ESG funds more than doubled in a year to reach a record $1.4tn in April 2021, with the rate of investment around three times that of non-ESG equivalents. During 2021 around one third of global equity inflows have been into ESG funds, according to the bank’s data. Statistics from the global Net Zero Asset Managers Initiative are even more staggering. The initiative, which was launched in December 2020 and supports investing aligned to achieving net zero greenhouse gas emissions by 2050, now has 128 signatories representing $43 trillion in assets under management. Put another way, total funds in the global asset management sector are estimated at $100tn according to Willis Towers Watson, meaning nearly half that amount is now aligned to net zero.

Until only recently widely seen as a niche investment consideration, ESG and sustainability have entered the mainstream, driven by multiple factors. The early days of the COVID-19 pandemic triggered calls from scientists and sustainability specialists to urgently address the interconnected nature of the most “wicked” global problems. At the forefront of the response were business leaders such as the World Economic Forum (WEF) which called for a “great reset” wherein companies are expected to develop new practices and business models that prioritize ESG policies. The WEF’s International Business Council calls this “stakeholder capitalism.”

Since then, global policymakers and financial regulators have acted to increase transparent disclosure of ESG into corporate and investor decision making. In the US, the Securities and Exchange Commission is working to recommend mandatory company disclosures on climate risk, as well as on human capital, and to analyse the criteria used to define ESG funds. In the UK, the Financial Conduct Authority’s roadmap seeks to extend mandatory disclosure of  climate-related risks and opportunities in line with the Taskforce on Climate-related Financial Disclosures (TCFD) across the investment chain from companies to financial services firms and ultimately investors, by 2025. The FCA has also launched a consultation to strengthen diversity and inclusion among Boards and senior management of large, listed companies that would increase disclosure on a “comply or explain” basis. The consultation proposes Board composition targets of 40% women, and at least one member from a non-White ethnic minority background, as categorised by the Office of National Statistics. And in Europe the European Commission is pursuing multiple initiatives including the EU Taxonomy, a classification system to provide common definitions for environmentally sustainable economic activity, and the Renewed Sustainable Finance Strategy which sets out a roadmap for action on international sustainable finance initiatives. (FTI’s full timeline of European sustainable finance initiatives is available here.) Taken together these measures represent a significant recalibration of the financial system towards greater disclosure and transparency on key ESG issues.  This is the backdrop to the most recent research undertaken by FTI with global institutional investors summarized here.

“82% of surveyed business leaders in G20 countries agree that companies should be run in the interest of all stakeholders, not just shareholders.”

Source: FTI Consulting Resilience Barometer

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