ESG: Going Beyond the Balance Sheet
What is ESG, what factors does it reflect, and is it a long-term trend or simply a flash in the pan?
Read, watch and explore need-to-know insights about ESG here.
Discover the meaning of ESG, the significance of the global trend towards ESG investing, the information companies provide on it, and how the field is evolving in 2019.
Watch our video to understand the essentials of ESG, including the ESG factors that a typical ESG report might assess.
Explore our map to see where S&P Global is making a difference through its own ESG and sustainability initiatives.
What is ESG and ESG investing?
The acronym ESG refers to a broad range of environmental, social and governance criteria on which companies are measured. It reflects the growing sensitivity of consumers to how companies operate as factors in their buying decisions. And it is of increasing interest to investors who are concerned about companies adopting practices that will mitigate risk and ensure their long-term sustainability. As a result, ESG issues are increasingly shaping the way companies do business around the globe.
Since the term was first popularized in 2005, investors have increasingly seen value in the idea of using ESG factors to guide investment decisions. The idea of ESG investing is an evolution of the trend toward socially responsible investing, but ESG provides a broader framework for looking at social impact beyond simply excluding companies associated with negative outcomes.
What factors does ESG reflect?
The factors used to measure ESG performance can vary, but typically include things such as:
- • Environment: Greenhouse gas emissions, waste and pollution, water use, land use
- • Social: Workforce and diversity, safety management, engagement with communities
- • Governance: Governance structure and oversight such as board composition, code and values, transparency and reporting, cyber risk
S&P Global Ratings uses these factors and more to carry out its ESG Evaluations.
How large is the trend towards ESG investment?
Having previously been something of a niche area, the use of ESG factors to steer investment decisions is now becoming much more widely accepted.
According to a report released by the Global Sustainable Investment Alliance on April 1, the level of global sustainable investments reached a new peak of $31 trillion at the beginning of 2018, a 34% increase from 2016.
Across five major regions analyzed by the report, Europe and the U.S. remained the largest markets for sustainable investments in 2018, with $14 trillion and $12 trillion in assets under management, respectively. The third-largest and fastest-growing region was Japan, which saw growth of more than 300% to reach $2 trillion in AUM.
The U.N. Principles for Responsible Investment, a set of principles for incorporating ESG issues into investment practice, has been signed by 345 large asset owners. Meanwhile, Amundi, Europe’s biggest asset manager, has pledged to fully screen for ESG in 100% of its investments by 2021.
Is this just a blip, or is the trend expected to continue?
The trend will persist, as investors across a wide range of asset classes now show a growing interest in ESG, predicts Libby Bernick, Global Head of Corporate Business at Trucost, the S&P Global Market Intelligence unit that assesses risks relating to climate change, natural resource constraints and broader ESG factors.
“Social and human capital issues are also on the rise, as diversity, data privacy, and the treatment of labor in supply chains are being looked at with a closer lens. It is clear that company disclosure on ESG issues will be very important now that 49 stock exchanges have committed to publish ESG disclosure guidelines,” she writes.
“Companies in the U.S., where there are no mandatory disclosure requirements, will be in the curious condition of competing for capital with companies located in emerging economies that have better ESG disclosure.”
Why will ESG persist as an important topic?
"We know markets can have a transformative effect on society and can build a better world, and investor focus on sustainability issues has never been greater," says Michael Wilkins, Managing Director of Sustainable Finance at S&P Global Ratings.
"This is not just down to concerns about environmental issues such as climate change, but also broader considerations, such as what is a purpose-driven corporation and how are its stakeholders engaged in its purpose."
How are approaches to ESG evolving in 2019?
Speaking to S&P Global’s ESG Insider podcast, Rakhi Kumar, Head of ESG Investments and Asset Stewardship at State Street Global Advisors, listed five trends shaping ESG investment in 2019.
- • A shift from pure exclusionary investment strategies towards integrated strategies;
- • The use of multiple data sources to power ESG strategies;
- • More targeted measurement of ESG strategies against desired objectives;
- • A move towards climate solutions or adaptation, as well as mitigation; and
- • A drive for greater diversity and talent in ESG teams.
Corporate issuers are also evolving their approaches. S&P Global Ratings's Wilkins highlights a rise in sustainability-linked financial instruments, such as loans, bonds and guarantees, which provide incentives for borrowers and lenders to exceed ESG performance targets. "These innovative instruments expand on the growing trend in the capital markets to reward companies for improving their sustainability performance, or penalize them for underperforming," he says. "There is a growing realization that good ESG performance and financial performance are linked."
What information do companies provide on ESG factors?
The level of disclosure companies provide around ESG factors varies, with disclosure rules in different jurisdictions playing a heavy role.
The Task Force on Climate-related Financial Disclosures (TCFD) is an industry-led organization set up under the auspices of the G-20 to ensure clear and consistent reporting of climate-related risks, in particular. More than 833 organizations supported the goals of the TCFD as of July 2019. This includes S&P Global, which issued a report disclosing its climate-related exposures and opportunities using the TCFD framework in May this year.
The report makes use of the same Global Carbon Pricing Tool that Trucost offers to external clients.
How does S&P Global help investors understand ESG?
Since February 1, S&P Global Ratings has included an ESG section in its corporate credit rating reports for all corporate issuers. S&P Global Ratings ESG Evaluation, launched on April 11, offers a data-driven assessment of an entity’s performance according to ESG factors, along with an assessment of preparedness for future risks and opportunities.
Meanwhile, S&P Dow Jones Indices debuted the S&P 500 ESG Index on April 8. The index closely tracks the risk and return profile of the S&P 500, providing a broad market exposure and industry diversification. But by using S&P DJI ESG Scores and other ESG data to select companies, the index offers a superior ESG profile compared with the S&P 500.
What else is S&P Global doing in the area of ESG?
Our portfolio includes comprehensive company-level ESG metrics, vital data, market benchmarks, analytical tools and standards to help customers create resilient strategies to maximize financial performance, build a sustainable future and meet the expectations of an evolving market. Trucost, an S&P Global company, is a leading provider of ESG analysis, advisory services and research.
S&P Global strives to model operational best practices, enlisting employees and partners in advancing sustainable business within and beyond our walls. We have ambitious targets to further reduce our carbon footprint, waste, and paper and plastic use. You can read about these initiatives in our 2018 Environmental, Social and Governance Report, and explore some of them using the map below.
S&P Global Offices with Sustainable Initiatives
S&P Global Office Locations
BCA Green Mark is a green building rating system to evaluate a building for its environmental impact and performance.
ISO 14001 provides a system for measuring and improving an organization's environmental impact.
LEED, or Leadership in Energy and Environmental Design, is the most widely used green building rating system in the world.
Where can I go for more information?
Here are some useful links where you can learn even more about ESG and related topics:
- Oxford University’s Sustainable Finance Programme
- Prince of Wales Accounting 4 Sustainability
- Sustainability Accounting Standards Board
- Task Force on Climate-related Financial Disclosures
- U.N. Global Compact
- U.N. Principles for Responsible Investing
- World Business Council for Sustainable Development
- UK Green Finance Initiative Working Group on Risk, Data & Disclosure