Profitability is no longer the only method investors use to assess whether a business is a secure opportunity. With growing scrutiny around ethical organizational practices, the link between sustainable operations and 21st-century investors has never been stronger.
Businesses are now quick to incorporate ESG factors into their ethos. As a result, their impact on their surrounding environment propels further business growth and cements the business as a lucrative long-term investment.
How is ESG data used in investment decision-making?
The ESG (Environmental, Social and Governance) framework is utilized to understand an organization's activities and its understanding of ethical and sustainability concerns.
Environmental
When businesses account for Environmental factors, the organization understands how their day-to-day and long-term activities affect the surrounding environment. This includes understanding how processes negatively or positively impact global challenges such as climate change or communal issues such as waste management or pollution.
Social
Social factors help businesses introduce and sustain internal ethical practices to ensure stakeholders are treated fairly. Social factors ensure businesses do not propagate discriminatory practices and ensure all individuals are affected by organizational activities.
Governance
Governance factors ensure the business stays compliant with legal requirements and practices. This means incorporating recognized industry practices and policies into corporate culture and ensuring activities could not be scrutinized or fined at a later date.
Integration of ESG Factors in Investment Decision-Making
ESG is not just a buzzword. A growing number of investors are using ESG metrics as a non-financial metric to understand where potential risks lie and how strong prospects for growth are.
As of 2022, 89% of investors considered ESG data and issues in their investment approach. 31% of European investors and 18% of North American investors have revealed ESG data to be the most critical factor when considering investments.
Growing interest has prompted the development of a number of reputed institutions whose sole purpose is to standardize ESG assessment factors. As a result, the new era of investors is able to access information critical to their decision-making process and long/short-term goals.
The Role of Data Providers and Research Firms in the ESG Data Market
With the growing standardization of ESG assessment metrics, investors are looking to widely known data providers and research firms for validated information. Market Data providers such as Bloomberg and Thomson Reuters now offer information about ESG topics using proprietary methods. The data providers also offer businesses statistics around the social aspect of ESG, allowing them to better understand industry trends and changes to be made.
The rising demand for ESG information has also created specialized data suppliers. Companies, including Ethos and Convalence, offer end-to-end ESG data services. They customize their assessment techniques based on the information needed and assist investors with risk analysis tools for better decision-making.
Finally, specialized data providers help investors detect new opportunities or assess risk by offering comprehensive data around one or two ESG factors.
It is important to understand there is minimal information about how ESG factors directly affect finances. Data providers and research firms offer an abundance of verified supplementary information to prevent irrelevant comparisons and account for disparities.
Emerging Trends in ESG Data and Reporting
The growing popularity of ESG investing has risen to assets worth USD $2.5 trillion as of 2022. Observing ESG data trends and market trends simultaneously allows investors to minimize risks while maximizing returns.
Here are the trends ESG investors are looking at in 2023:
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Impact of Climate Change
While climate change has been a global issue for years, 2023 is likely to see an increased focus. Companies are assessing their carbon footprint and adjusting their day-to-day activities accordingly.
The post-COVID global economy, with all its negatives, showcased that companies are still able to operate and lower overall running costs while introducing new practices. Larger scale industries, including construction, transport, aerospace, and defence, are able to adjust their activities to join the green movement. As this trend grows, ESG-based investments grow, and businesses can adhere to newly established market trends to stay appealing.
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The Ethics Behind Supply Chains
This generation of customers wants answers. It is no longer just about the efficacy of a product but the steps taken to create it. Customers are now looking into the role of human rights, working conditions, child labour law, and other critical codes of conduct in order to decide whether to purchase.
Companies working in fast fashion, for example, have been the centre of news headlines describing how low costs are translated down to customers leading to protests and boycotts.
ESG investors now require regular audits, a thorough understanding of conduct codes, and demonstrations around training for employees. Companies that are not ESG compliant have a hard time gathering investment. In this case, slow fashion companies that work with upcycled garments, recycled fabrics, and ethical practices not only receive hefty investments but a strong customer base as a result of their conscientiousness.
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Diversity, Equality and Inclusion (DEI)
The conscious consumer is less likely to support businesses with unfair internal practices or compliance with discrimination. As organizations focus on including diversity and understanding subconscious bias, customers are more likely to feel comfortable engaging with the organization and its products.
As a result, businesses are more likely to share information about the lack of gender bias, equal pay policies, annual training and introducing more diversity in positions of leadership.
ESG investors invest in companies that consciously include diversity and equality as new demographics open, more customer-friendly practices are in place, and employees content with their workplace put out higher quality products and services.
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Reduce, Reuse, Recycle
The slogan has circulated the globe with ideas around minimizing waste and upcycling items that no longer serve their original purpose. ESG investors are constantly on the lookout for businesses that have disrupted traditional models and introduced better practices around consumption and waste.
A strong force for 2023 is businesses introducing new methods to harness any unwanted material as a result of their activities and repurposing the same not only to assist the business but surrounding communities.
ESG investors identify an organization's willingness to maintain profitability while being conscious and ethical as an ideal candidate for investment.
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Keeping Digital Identities Safe
We live in the age of technology. Your virtual identity can do anything from creating social structures to handling finances. As more businesses have migrated to e-commerce, there is a growing concern about customer information staying private as opposed to being repurposed or stolen.
Businesses factoring in ESG often have transparent information about collecting customer data on their websites. This allows customers to understand what purchasing from a website means and make an educated decision to complete the transaction or purchase from elsewhere.
ESG investors have witnessed many of an organization's downfalls as a result of selling customer information to 3rd parties or a lack of adequate cyber security measures. Businesses with strong data protection policies in place automatically become more appealing to ESG investors. Non-compliant businesses are likely to be on the receiving end of strong legal action and build a lack of trust with prospective customers.
Read also: The Evolution of ESG Data and its Future Outlook
What is the market outlook for ESG data?
ESG factors are critical to business success in the 21st century. In an era of cancel culture and accountability, investors are looking for longevity. Investing in a business that is supported by surrounding communities and the government and minimizes collateral damage has never been more critical. As more standardized information is shared around the ESG metric, businesses are left with no choice but to introduce better internal and external practices to ensure survival.
As the number of ESG-centric investors grows and the value of ESG assets rises, the global economy can look forward to being fueled by companies that approach business with a more holistic perspective.
SG Analytics is an industry leader in ESG services, providing custom sustainability advice and research to aid deliberation. Contact us today if you are looking for an effective ESG integration and management solution provider to improve your company's long-term viability.
