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Criticizing ESG integration doesn’t make it less essential | blog post

Criticism of environmental, social and governance (ESG) considerations in investing has increased significantly in recent months.

This attention and pushback is more of a symptom of the scale of responsible investing, but it has understandably also raised questions among investors. Although ESG integration is not new, many are new at this.

Some investors may be wondering if they should continue to embrace ESG integration as it comes under intense scrutiny. So should they? The answer is, without a doubt, yes.

ESG integration is proof that markets work and therefore consideration of ESG factors should be a fundamental part of investing. It is about considering information that may be material to the value of investments – and ESG investment practices are largely driven by investor needs.

As such, ESG factors are not separate from fundamental investment analysis; they represent a natural evolution of the data available to (and taken into account by) investors in their decision-making.

Whether used to assess how companies are responding to racial equity issues or to implement carbon reduction targets, ESG factors provide insight into how companies view and respond to issues. that can impact their short and long term success.

Increasingly, investors understand that their duty to fulfill their obligations to their clients can be fundamentally and lastingly affected by ESG trends – and the resulting sustainability outcomes.

Using ESG information to align portfolios with these trends can be beneficial for winning business today and protecting portfolios and clients in the future. In this way, ESG factors provide the information investors need to achieve their investment objectives and fulfill their fiduciary obligations.

In this context, it is interesting to note that US Treasury Secretary Janet Yellen recently stated: “The flow of capital from carbon-intensive to carbon-neutral investments is probably the most dramatic and the most predictable in human history. The transition is already underway. »

With such a profound change in investment flows underway, it is difficult to say that it will not bring benefits – in terms of returns for investors, and contribute to sustainable outcomes by mitigating climate change.

Our role within the Principles for Responsible Investment is to support investors around the world in their efforts to better access and integrate ESG information into investment decision-making. We provide advice on best practices, enable collaboration between signatories and engage with regulators to highlight the consideration of potentially material ESG information.

ESG integration is an evolving practice, and investors, governments and regulators are at different stages of this evolution. Encouragingly, our regulatory database shows that regulators around the world are setting standards to improve the integrity and efficient functioning of markets when it comes to ESG integration. Pushing investors to ignore ESG information – through rhetoric or politics – would be to overlook data that can impact an investment’s risk and returns.

This not only risks missing important information, it could be a breach of fiduciary duties. The PRI’s Legal Framework for Impact project explores this in more detail.

Around the world, tremendous work is being done to better develop and align ESG practices for lasting effect. Adoption of the Task Force on Climate-Related Financial Disclosures recommendations continues to grow and was last recorded at more than 2,600 organizations.

The International Financial Reporting Standards Foundation, whose accounting standards have been adopted by 140 countries, is working on a benchmark set of climate-related ESG disclosures.

The European Union and the United States Securities and Exchange Commission have proposed similar requirements to begin establishing a baseline of what environmental information means to investors.

The PRI also supports regulators’ efforts to reduce greenwashing and ensure that savers and investors get the services advertised by their investment managers and asset owners.

There is still work to be done to determine how ESG integration can be better adopted in financial markets, and the focus should be on providing transparent and actionable information for investors and beneficiaries.

The PRI has over 5,000 signatories with approximately $120 trillion in assets, and these investors have made it clear that they consider ESG factors because of their importance to the value of investments.

To ensure better decision-making by investors, an open discourse on how ESG integration will evolve in a rapidly changing market should be welcome.

But for this to be productive, we need to focus on how the right approaches provide vital transparency and enable markets to work to improve investment outcomes.

It is clear that we must continue to support investors in collecting, considering and using ESG information to achieve investment objectives and secure beneficiaries’ investments over the long term.

Investors have an important role to play – and ESG integration is a key tool to help them fulfill it.

This blog is written by PRI staff members and guest contributors. Our aim is to contribute to the wider debate around topical issues and help showcase some of our research and other work we undertake to support our signatories. Please note that while you can expect to find articles here that broadly reflect the official views of the PRI, the blog authors write in their individual capacity and there is no ‘inside view’. The views and opinions expressed on this blog also do not constitute financial or other professional advice. If you have any questions, please contact us at [email protected]

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