Is ESG integration on the rise?

Integration of environmental, social and governance factors is moving toward the mainstream of institutional investment management, making it hard for business leaders to ignore. 

Effective and responsible leaders are those who are able to integrate ESG throughout all aspects of their business and their strategy.

In previous decades we mostly focused on leaders who were exceptionally good at managing within the economic context. Now we need leaders who can also thrive within the social and environmental context in which their businesses operate. The two are in fact intrinsically interdependent and building an integrated business model is the way to establish a truly sustainable competitive advantage in the long term.

But users lack agreement on factors, weightings, scoring, standards and definitions, as well as application into investment analysis. Money managers need to provide more disclosure around practices, specifically ESG criteria they consider and how they systematically apply integration to allow institutional investors to better evaluate the use. 

Money managers still are grappling with how to integrate ESG. This has been done in different ways, using different strategies, different investment philosophies. Depending on who you ask, you will get different answers because it (ESG incorporation) is an interpretation that will be subjective at each and every fund manager.

In terms of data, there is not one standard of what ESG means, presenting a challenge to institutional investors. Companies in each sector work out what are the relevant metrics to disclose on in relation to an ESG framework.

ESG is not about doing things that are moral or immoral or what is good and what is evil. It’s about whether the steps that corporations are taking are compatible with sustainability for long-term performance.

If we want (companies) to be effective in terms of social behaviour and environmental behaviour, the best way to do that is to make sure first of all that the board is diverse and is really empowered vs. the executives of the company.

Corporate governance data is much more reliable than the data gathered on the other dimensions of ESG. The corporate governance data are very objective. They are very factual. The other data (E and S) … is sometimes based on opinions rather than facts.

Where companies are making great strides in sustainability you will see this not only in their management training but also in their corporate governance and in the types of incentives which motivate executives to move beyond financial outputs.

The successful sustainable company will have a board that oversees the company’s sustainability commitments and structured processes to engage with stakeholders and that imaginative spirit of experimentation and collaboration, transparency and accountability, which are so crucial if sustainability is to thrive, not just survive.