Why invest in sustainable finance: ESG factors are increasingly important

State Street Global Advisors, the asset management division of State Street Corporation, published in November 2019 an interesting research that has as its theme the determinants that push or slow down the adoption of ESG principles (environmental, social and governance), such as emerged from a survey involving 300 institutional investors globally. From the answers, various indications can be drawn on the future of sustainable finance.

ESG factors: from regulatory obligations to elements of investment portfolios

The adoption of ESG criteria is driven by the need to comply with the fiduciary obligations and the regulations imposed by the supervisory bodies, but also more pragmatically by the management of ESG risks in the portfolio.

“The fact that fiduciary obligations have been widely cited represents a significant development, as many investors previously struggled to determine whether adopting ESG criteria was contrary to their fiduciary objectives or not,” said Rakhi Kumar, Head of ESG Investments and Asset Stewardship of State Street Global Advisors. “Together with regulation, this is now one of the main key factors for implementing ESG factors“.

There are important regional differences as regards the main drivers of ESG criteria adoption. For example, fiduciary obligations are more felt in North America than in the EMEA area (Europe, Middle East, and Africa), where instead regulatory changes have been indicated as the main factor in favor of adoption.

“The results of the research confirm what our clients communicate to us,” said Carlo Funk, EMEA Head of ESG Investment Strategy. “The regulatory enviroment is clearly pushing institutional investors towards a radical change in ESG practices. Over the past year, most of our customers have explored different solutions for carbon profiles and the risks associated with climate change present within their portfolios”.

What slows down ESG factors and sustainable finance

In contrast, the main obstacles are:

• the lack of reliable and consistent data on ESG criteria
• resource issues
• the costs of internal integration
• infrastructure
• knowledge creation, lack of ESG talent available to manage integration

The result is a more diversified picture, with the unreliability and inconsistency of data in the ESG area which is cited by 44% of respondents as the main deterrent.

Finally note that, with regard to the last factor on the list, 95% of the interviewees reiterated their intention to hire a greater number of ESG specialists in the next three years, given the growing importance of the ESG criteria as a relevant component in the inside an investment portfolio.