Global investor interest in environmental, social and governance (ESG) has intensified this year as the buy-side has made ESG a top priority and is increasingly putting pressure on companies to improve and report on sustainability practices.
ESG has been around for years, but only recently started to gain traction among investors globally. European countries have led the way in terms of implementing sustainable business practices. U.S. investors and companies, however, only shifted their attention to ESG in the last couple of years.
“When we look at the U.S. markets, we’ve seen such a change,” said Foli Pontillo, global head of Nasdaq’s Perception Practice. “Five years ago, we weren’t really talking about ESG with U.S. investors. Over the past couple of years, we’re talking about ESG in about 50% of the conversations that we’re having.”
Research by Robert Eccles, a professor of management practice at Saïd Business School at the University of Oxford, supports Pontillo’s experience. Eccles interviewed 70 senior executives at 43 global institutional investing firms, including the world’s three biggest asset managers – BlackRock, Vanguard, and State Street – as well as massive asset owners, such as the California Public Employees’ Retirement System (CalPERS), the California State Teachers’ Retirement System (CalSTRS), and the government pension funds of Japan, Sweden and the Netherlands.
“We found that ESG was almost universally top of mind for these executives,” Eccles wrote for Harvard Business Review. “It was clear to us that corporate leaders will soon be held accountable by shareholders for ESG performance—if they aren’t already.”
Pontillo noted that when she speaks with buy-side investors, they talk about having revised mandates that force them to think more about ESG and how it’s evolving. Many firms are looking for quantitative data on sustainable practices – some rely on ESG rating agencies to direct their path, but others are gathering information in house, Pontillo said.
The overall uptick in buy-side ESG interest has been partly driven “by us taking a proactive stance and saying to our corporate clients that this is something that’s here to stay, and why not take your pulse and get a feel for how the relevant investment universe feels about ESG and how they are incorporating into their investment decision-making process,” Pontillo said. “In essence, we don’t want them to miss an opportunity to attract new investment capital and position their story in an effective way.”
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