How ESG Investing Drives Sustainable Investment Practices

 How ESG Investing Drives Sustainable Investment Practices

 

ESG investing, which stands for considering environmental, social, and governance factors in investment decisions, has become an increasingly critical part of the investment process . As concerns over climate change, social issues, and sustainability grow, investors are applying these non-financial ESG metrics to identify material risks and growth opportunities .

ESG analysis aims to gain a more comprehensive understanding of companies' practices beyond just financial performance  This article will explore the evolution of ESG investing, its key components and strategies, as well as the benefits and challenges associated with this approach to sustainable investing .

What is Sustainable Investing?

Sustainable investing, also known as ESG (environmental, social, and governance) investing or responsible investing, refers to an investment approach that aims to generate financial returns while promoting long-term environmental or social value  It involves considering non-financial factors, such as a company's impact on the environment, its treatment of employees and stakeholders, and its corporate governance practices, alongside traditional financial metrics .

Definition and Terminology

ESG investing is sometimes referred to as sustainable investing, responsible investing, impact investing, or socially responsible investing (SRI) . While these terms are often used interchangeably, they may have slight variations in their focus and approach.

Key Components of ESG Investing

ESG investors seek to ensure the companies they fund are responsible stewards of the environment, good corporate citizens, and led by accountable managers based on the following criteria :

1. Environmental: Investors evaluate corporate climate policies, energy use, waste, pollution, natural resource conservation, and treatment of animals . Considerations may include direct and indirect greenhouse gas emissions, management of toxic waste, and compliance with environmental regulations.

2. Social: A company's relationships with internal and external stakeholders are evaluated . Does the company donate a percentage of profits to the local community or encourage employees to volunteer? Do workplace conditions reflect a high regard for employees' health and safety?

3. Governance: Ensures a company uses accurate and transparent accounting methods, pursues integrity and diversity in selecting its leadership, and is accountable to shareholders .

Relationship with Sustainability

ESG and sustainability are closely related . ESG investing screens companies based on criteria related to being pro-social, environmentally friendly, and with good corporate governance . Together, these features can lead to sustainability . ESG, therefore, looks at how a company's management and stakeholders make decisions, while sustainability considers the impact of those decisions on the world .

Socially responsible investing (SRI) is an investment strategy highlighting one facet of ESG . SRI investors seek companies that promote ethical and socially conscious themes, including diversity, inclusion, community focus, social justice, corporate ethics, and racial, gender, and sexual discrimination .

The Evolution of Sustainable Investing

The core concept of ESG investing has existed for centuries, dating back to religious codes banning investments in slave labor . In the 1960s and 1970s, divestments from South Africa were first advocated to protest the country's system of apartheid, driving socially responsible investing strategies .

Roots of ESG traced to SRI in the 1960s-70s

In 1971, two United Methodist ministers opposed to the Vietnam War created the Pax World Fund, the first publicly available mutual fund in the U.S. that factored social and environmental criteria into investment decisions . Meanwhile, pension funds with worker-investors' interests began targeting investments in areas geared to improved healthcare and affordable housing .

Late 20th century saw momentum in environmental movement

The latter part of the 20th century witnessed a surge in environmental activism and awareness, driven by concerns such as pollution, habitat destruction, and climate change . Growing consciousness about these environmental issues prompted investors to consider companies' environmental practices as part of their investment decisions, reflecting a broader societal concern .

1980s-90s: Pension funds, asset managers engage on social, environmental issues

Institutional investors began actively engaging with companies on social and environmental matters during the 1980s and 1990s, recognizing the importance of these factors in long-term performance . Shareholder advocacy and engagement campaigns played a significant role in pushing companies to improve their ESG practices during this period .

Early 2000s witness emergence of ESG reporting and integration standards

Various frameworks and standards for reporting and integrating ESG factors into decision-making processes began to emerge, including the Global Reporting Initiative (GRI), Principles for Responsible Investment (PRI), and Carbon Disclosure Project (CDP) .

UN's PRI (2006) urges ESG integration in investments

The launch of the United Nations' Principles for Responsible Investment (PRI) in 2006 encouraged investors to integrate ESG factors into their investment decisions, further mainstreaming these considerations .

Past decade sees ESG move from margins to mainstream

Over the past decade, ESG considerations have transitioned from being on the fringes to becoming mainstream, with investors, companies, and stakeholders increasingly recognizing their material impact on financial performance and risk management . Sustainable investing, encompassing strategies such as ESG integration, impact investing, and socially responsible investing (SRI), has become increasingly popular as investors seek to align their financial goals with broader societal and environmental objectives .

Key Components of Sustainable Investing

ESG integration recognizes that sustainable and responsible business practices are essential for long-term value creation. The key components of ESG investing are as follows:

Environmental

The environmental aspect of ESG focuses on a company's impact on the natural world, including its carbon emissions, resource consumption, waste management, and commitment to renewable energy sources . It captures energy efficiencies, carbon footprints, greenhouse gas emissions, deforestation, biodiversity, climate change and pollution mitigation, waste management, and water usage .

Social

The social component of ESG considers a company's relationships with its employees, customers, suppliers, and local communities . It encompasses factors such as labor practices, diversity and inclusion, community engagement, and product safety . Social knowledge ranges from labor linkage with legal product obligations, such as managing the supply chain, investing in the public interest, labor and human rights guidelines, and how health and safety effectively negate risks .

Governance

The governance pillar examines the systems and structures that govern a company, including board composition, executive compensation, risk management, transparency, and ethical conduct . It ensures accountability, responsible decision-making, and protection of shareholder rights . In addition, companies should have an active management structure that includes a board, research strategies, ethics, and shareholder rights according to the area and economy of the company, which can develop confidence and promote innovation in the market .

ESG frameworks are important to sustainable investing because they can help individuals or other corporations determine whether the company is in alignment with their values, as well as analyze the ultimate worth of a company for their purposes .

Sustainable Investing Strategies

There are several strategies employed in sustainable investing, including negative/exclusionary screening, positive/best-in-class screening, and impact investing.

Negative/Exclusionary Screening

Negative screening, also called exclusionary screening, is the process of excluding specific companies or sectors from a fund or portfolio . This is executed by determining the criteria for exclusion upfront based on a specific goal. For instance, if the goal is to decrease climate change's impact, you may exclude all fossil fuel companies from your portfolio .

Positive/Best-in-Class Screening

Positive screening, also called best-in-class screening, is the process of selecting a subset of top-performing companies from a defined industry and a set of characteristics to invest in . This can be thought of as the opposite of negative screening. Instead of setting criteria by which to exclude companies, you pre-determine which performance measures you'll use to select top performers . For example, you may invest in the 10 apparel companies with the lowest carbon footprint or the five appliance companies with the most diverse boards of directors .

Positive screening often looks to include only the best companies in a given impact category in the fund or portfolio . Best-in-class screening also encourages companies to compete with each other for investment dollars . When investment funds are based on the environmental, social or governance performance of companies, this incentivizes companies to compete with one another to create more impactful change . Positive screening not only rewards companies that do well, but it encourages industry peers to further advance their positively impactful corporate practices as well .

Impact Investing

Impact investing is a way to invest your money with the intent to bring about some socially desirable outcome with the expectation of a financial return . There are three key components to impact investing:

1. Investment with the intention to do good
2. Expectation of financial return
3. Creating measurable impact 

Measuring the impact of one's investment is a central tenet of impact investing . If you are investing to make a difference, you should utilize measures to understand the true impact your investment is having .

Benefits of Sustainable Investing

Sustainable investing offers several key benefits, including enhanced long-term financial performance, positive social and environmental impact, and improved risk management.

Long-Term Financial Performance

Studies indicate that integrating environmental, social, and governance (ESG) factors into investment decisions can lead to better long-term financial performance. According to Morgan Stanley's Institute for Sustainable Investing, sustainable equity funds and sustainable taxable bond funds outperformed their traditional peer funds in 2020 during the height of the pandemic . Improved financial performance due to ESG becomes more marked over longer time horizons . ESG integration, broadly speaking as an investment strategy, seems to perform better than negative screening approaches . A recently released Rockefeller Asset Management study finds that ESG integration will increasingly be demarcated between "Leaders" and "Improvers" with the latter showing uncorrelated alpha-enhancing potential over the long-term .

ESG practices can also contribute to better cost management, employee retention, and innovation, leading to more sustainable long-term growth prospects . Furthermore, ESG practices can help companies manage more effectively and efficiently environmental and social risks, potentially mitigating legal, regulatory, and reputational costs that could adversely impact financial performance . These results are consistent with those of previous studies. Chang and Lee (2022) found that performance will improve when organizations increase their investment in sustainable development . Using data on Bangladesh's manufacturing industry, Zhou et al. (2023) found that companies with better ESG performance tend to have more sustainable and innovative performance .

Social and Environmental Impact

By investing in companies that prioritize environmental and social considerations, sustainable investing can drive positive change and contribute to addressing global challenges such as climate change, social inequality, and environmental degradation. Companies with strong ESG practices often have a lower carbon footprint, better labor practices, and more robust corporate governance, which can have a positive impact on society and the environment.

Enhanced Risk Management

Incorporating ESG factors into investment decisions can help investors better manage risks and identify potential issues or opportunities that may not be captured by traditional financial analysis alone. For example, companies with poor environmental practices may face increased regulatory risks, while those with strong governance structures may be better equipped to navigate challenges and adapt to changing market conditions. By considering ESG factors, investors can make more informed decisions and potentially mitigate risks associated with environmental, social, and governance issues.

One major risk factor that impacts all pillars of ESG is climate change . Climate change naturally falls within the environmental pillar; however, it also impacts social and governance pillars . Transitioning to low-carbon emissions and management's attitude toward aligning climate outcomes are relevant risk factors, as well . The geographic location of an organization, products and lines of business, and operations each have financial climate risk implications .

Challenges in Sustainable Investing

Data Availability

One of the key challenges in sustainable investing is the lack of standardization in sustainability data reporting . Companies often report data using different standards and metrics, making it difficult for investors to compare and assess their performance accurately . Additionally, sustainability data can be incomplete, inconsistent, or unreliable, as companies might omit negative information or engage in selective reporting, emphasizing positive actions while minimizing negative impacts .

Determining the scope and materiality of sustainability factors can also be subjective, with companies potentially prioritizing less critical factors for a positive image while neglecting more important issues . Limited regulatory oversight and enforcement in sustainability reporting lead to a lack of accountability for companies engaging in greenwashing practices . The complexity of sustainability issues, which are multifaceted and interrelated, makes it challenging to capture their full impact accurately .

Greenwashing can occur due to data problems, including misleading metrics, inadequate disclosure, lack of verification, complexity masking, and limited transparency . High-quality ESG data is paramount in mitigating greenwashing risks and enhancing transparency . Establishing clear processes for data collection, management, and traceability ensures the accuracy and reliability of sustainability claims . This starts with establishing a clear structure around portfolio-level data collection, including what metrics will be collected and guidance to help portfolio companies report accurately .

Firms should also communicate why they are interested in specific ESG data, its importance to the portfolio company, and how they intend to use it . Collecting this data is more than a "tick-the-box" exercise; understanding the motivations behind requests is key to improving data quality . With accurate data, firms and portfolio companies can support sustainability claims, communicate effectively, and track progress over time .

Another obstacle that can lead to greenwashing is limited available ESG data, a challenge that can be addressed through the use of estimates . Deepki's actual energy consumption database of over 400,000 buildings enables it to run cutting-edge machine learning models, helping to approximate the consumption data of an asset with reference values . When data is occasionally missing at a more granular level, data gaps can also be filled at the meter level or extrapolated based on known consumption of other tenants or meters from the same asset . These AI-based estimates, integrated into the Deepki Ready platform, automatically address data gaps and offer a comprehensive view of overall consumption . Deepki's approach extends to estimating energy consumption (electricity, gas, district heating, district cooling, propane, and heating oil), instrumental in converting CO2 eq emissions with more accuracy . Ensuring extensive data coverage and maintaining data quality is essential for achieving high-quality reporting standards and enhancing transparency in sustainability disclosures .

Greenwashing

As more sustainable investments come to the market, concerns about greenwashing are growing among investors . Greenwashing is a practice where sustainability-related statements, declarations, actions, or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product, or financial services . This practice can be misleading to consumers, investors, and market participants while also carrying reputational risks .

According to the European Securities and Markets Authority (2023), the working definition of greenwashing in investments is "a practice where sustainability-related statements, declarations, actions, or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product, or financial services. This practice may be misleading to consumers, investors, or other market participants" .

Although greenwashing is not new, it has intensified in recent years as more companies seek to align themselves with this growing market trend . This phenomenon not only undermines investor trust but also poses significant risks to the legitimacy and effectiveness of the entire sustainable investing sector . One Morgan Stanley study found that while investors anticipate increasing their sustainable investments portfolio in 2024, 60% also expressed concerns about greenwashing and the lack of transparency and trust in reported ESG data .

Widespread misleading qualities include cherry-picking, omission, language ambiguity, empty claims, and the misleading use of ESG terminology . Greenwashing can be unintentional, contributing to investors' confusion and potential misinformation . Intentional or not, the consequences of greenwashing can be severe, as it distorts relevant information that current or prospective investors might require to make informed investment decisions . It can erode investor trust in the market for sustainability-related products, posing a significant threat to the financial system .

Regulatory Issues

To address greenwashing concerns, regulatory efforts have been undertaken, including the SEC's updated Names Rule, which prevents misleading fund names, and the Climate and ESG Enforcement Task Force, dedicated to identifying ESG-related misconduct . The Federal Trade Commission's Green Guides are designed to help marketers ensure that claims about the environmental attributes of their products are truthful and non-deceptive, setting a precedent for transparency .

The regulatory framework for sustainable finance in the European Union offers valuable tools for addressing greenwashing, promoting transparency, and ensuring compliance . Key among these are the EU Taxonomy, the Sustainable Finance Disclosure Regulation (SFDR), and the Corporate Sustainability Reporting Directive (CSRD) . The CSRD places particular emphasis on double materiality, obliging companies to divulge not only their environmental impact but also how external factors influence their financial performance .

Regulators are increasingly demanding more ESG disclosures, and it can be difficult for investors to find and verify the data needed to ensure investments meet ESG criteria and compliance requirements . Despite having a consensus definition of greenwashing in the EU, there is still a lack of agreement across different markets, and the absence of broadly accepted reporting and auditing rules makes it challenging for asset managers to clearly understand their compliance obligations .

These factors and others can lead asset managers to inadvertently make exaggerated or otherwise misleading ESG claims . Greenwashing risks related to compliance and regulations include missing reporting deadlines, providing incomplete or inaccurate information to regulators or investors, or failing to define and follow internal policies and practices .

If authorities find that a firm has greenwashed its products, it may face financial penalties alongside legal and opportunity costs to defend itself . Additionally, if an investee company poorly manages its greenwashing risk and is exposed for making misleading claims, investors may see the value of their investments negatively impacted, and the company's reputation and investor confidence may suffer .

Aside from financial penalties, regulators are increasingly serious about tackling greenwashing . The Sustainable Finance Disclosure Regulation (SFDR) aims to align financial flows with sustainable development goals and agreements and empower investors to make informed decisions to reduce the risk of greenwashing . The EU Taxonomy Regulation defines what can be considered an environmentally sustainable economic activity within the European Union . The Corporate Sustainability Reporting Directive (CSRD) came into force in 2023 to expand on the requirements of the Non-Financial Reporting Directive (NFRD) and place non-financial reporting on similar footing to traditional financial reporting .

The U.S. Securities and Exchange Commission has introduced new climate disclosure rules that address greenwashing in investments, requiring public companies to report on material climate-related risks, transition risks, severe weather events, and greenhouse gas emissions . In Canada, the Canadian Securities Administrators has proposed disclosure requirements to address greenwashing and, in 2024, produced updated guidance for issuers on ESG disclosures . Many of the largest countries and economies in Asia have developed sustainable finance taxonomies or have proposed rules and regulations aimed at addressing greenwashing .

Case Studies in Sustainable Investing

Here is the citations content for the section "Case Studies in Sustainable Investing" of the article "How ESG Investing Drives Sustainable Investment Practices" in markdown format:

The field of sustainable investing is constantly evolving, and case studies provide valuable insights into the practical application of ESG principles. These real-world examples showcase how investors navigate the complexities of integrating environmental, social, and governance factors into their investment decisions.

Parnassus Investments and Wells Fargo & Co.: Balancing Morals, Metrics, and Materiality

This case study examines the efforts of Ben Allen, CEO of Parnassus Investments, to invest in Wells Fargo while advancing the financial welfare of the firm's investors and the ESG values so important to many of them and the staff of the firm .

Engine No. 1: An ESG Upstart Challenges Fund-Industry Assumptions

A look into Engine No. 1's efforts to combine a new ETF that both met a need in the market for active ownership and satisfied gatekeepers with a hedge fund that occasionally pursued activist campaigns needing the support of the Big Three to succeed .

Striking a Balance Between Valuation and Values

This case study explores the decisions Michelle Dunstan and Jeremy Taylor, co-managers of the Alliance Bernstein Global ESG Improvers Strategy, had to make in their effort to buy stocks they believed had the best chance to deliver excellent long-term financial results and improve their ESG performance .

Choppies' Waters: Retailing in Botswana and Sub-Saharan Africa

This case study looks at the impact of Choppies, under the guidance of CEO Ramachandran ("Ram") Ottapathu, on Botswana and Sub-Saharan Africa .

Designing and Implementing an Integrated Project Management System at Minas-Rio

This case study examines the design and implementation of an Integrated Project Management System to achieve the ultimate goal of First Ore on Ship (FOOS) by November 30, 2014, by Paulo Castellari, CEO of the Anglo American subsidiary Iron Ore Brazil .

Glenmede: How to Credibly Bring an ESG Lens to Investing

A look at Amy Wilson's efforts to direct ESG investing within the Glenmede Investment Firm credibly and effectively .

Abraaj Group's Integration of ESG Policies into the Turnaround of K-Electric

This case study explores the efficacy of the Abraaj Group's strategy in changing the K-Electric company's direction, with the aim of transforming it into a sustainable, growth-oriented, private sector utility .

CFA Institute Case Studies on ESG Integration

The CFA Institute, in partnership with Principles for Responsible Investment, has compiled a collection of case studies to help investors better understand ESG integration in equity and fixed-income analysis . These case studies feature contributions from leading practitioners across 13 markets in the Americas, EMEA, and APAC regions, including Alliance Bernstein, Santander Asset Management, AGF Investments, and many others . The book also includes an ESG integration framework that collates various ESG integration techniques used by direct investors globally .

Future Trends in Sustainable Investing

Technology Advancements

Emerging technologies are poised to play a pivotal role in enhancing the measurement and reporting of ESG factors . Blockchain, a decentralized and unalterable digital ledger, offers numerous possibilities for improving ESG disclosure . For instance, Fishcoin utilizes blockchain to incentivize data sharing and improve traceability in the seafood industry, while Repsol, a Spanish energy company, leverages blockchain for product certification across its supply chain . Blockchain has also found widespread application in supporting financial transactions, emissions certificate trading, and contract management, which form the foundations of ESG implementation .

Digital twins, virtual representations of real-world physical objects or processes, are already being utilized in sectors like agriculture and mining . These digital replicas enable streamlining supply chains, optimizing networks, and responding to disruptions, with a growing number of organizations recognizing their potential to catalyze sustainability transformations .

Satellite imaging offers valuable applications for ESG, including measuring biodiversity, monitoring water reservoir levels and quality, assessing air quality, and tracking land usage . AI-assisted satellites can synthesize environmental data and convert it into actionable insights .

Cloud computing and analytics are also crucial ESG tools, facilitating automated data collection, standardizing data, reporting metrics, and enabling greater transparency within and between organizations . A PwC survey revealed that 60% of Fortune 1000 companies are either using or planning to use cloud technology to augment ESG reporting, while 59% leverage or intend to leverage the cloud to refine their ESG strategies .

Policy Changes

The COP28 United Nations Climate Change Conference in 2023 marked a significant milestone, with participants reaching an agreement to "transition away from fossil fuels in energy systems" . While some were disappointed by the lack of stronger language calling for a phaseout of fossil fuels like oil, gas, and coal, the agreement represented the first time the term "fossil fuel" was included in statements emerging from the annual conference .

The final COP28 agreement also called for "tripling renewable energy capacity globally and doubling the global average annual rate of energy efficiency improvements by 2030" . It further emphasized accelerating zero- and low-emission technologies, including renewables, nuclear, carbon capture and utilization, and storage, as well as substantially reducing non-carbon dioxide emissions, particularly methane, globally by 2030 .

Political discussions and negotiations on nature and climate are becoming increasingly interconnected, as the climate crisis is recognized as a subset of the broader challenge posed by the growing demands of a wealthier global population on finite natural resources . While nature-based solutions could deliver up to 30% of the emissions reductions needed to align with the Paris Climate Agreement, they currently attract only 2%-3% of global climate finance . COP28 brought heightened attention to nature-based solutions, with commitments to provide $2.5 billion for protecting and restoring nature, and pledges totaling $186.6 million to fund initiatives supporting forests, mangroves, and the ocean .

Market Growth

ESG investing soared during the COVID-19 pandemic and has emerged as a business-as-usual topic, even amid uncertain global economic conditions . Bloomberg Terminal forecasts that ESG assets will generate $53 trillion in valuation by 2025, representing a third of assets under management (AUM) .

Supply chain sustainability is crucial, as supply chains can account for more than 90% of a company's greenhouse gas emissions . Strategically sourcing partners and products with lower emission footprints aligns with ESG principles, and reporting these metrics is crucial for establishing transparency with stakeholders . Businesses are increasingly embracing digital transformation by adopting intelligent spending and business network technologies to gain visibility across supply chains and partner collaboration, enabling them to evaluate progress toward ESG goals .

Companies that have integrated digital transformation and emphasized sustainability have demonstrated financial benefits, outperforming their non-digital and non-sustainability-focused counterparts . As ESG investing becomes increasingly vital, future compliance and audit requirements will likely follow, making digitization essential for scaling resources and outcomes organization-wide .

With the 2050 net-zero emissions deadline approaching, stakeholder pressure is mounting for companies to take action sooner rather than later to mitigate the impending consequences of climate change . The accelerating shift towards clean energy will create demand for new skills across various sectors, leading to recruitment pressures for qualified candidates in the expanding green economy .

As regulations continue to evolve, the ESG data that companies need to track, report, and leverage to attract investor interest will also shift, requiring businesses to ensure that all personnel involved in developing ESG reports participate in the collaborative, centralized reporting model and understand their roles .

Investor interest in sustainable investing is on the rise, with 77% of global individual investors expressing interest in investing in companies or funds that aim to achieve market-rate financial returns while considering positive social and environmental impact . Over half (57%) of investors say their interest has increased in the last two years, and 54% anticipate boosting allocations to sustainable investments in the next year .

Investors prioritize climate action, healthcare, water solutions, and the circular economy as their top sustainable investing themes . Nearly 80% consider a company's carbon footprint and commitment to reducing greenhouse gas emissions when making new investments, with 51% willing to invest in traditional energy companies as long as they have robust plans to address climate change .

However, investors cite concerns about greenwashing and the lack of transparency and trust in reported ESG data as barriers to sustainable investing . They also express uncertainty about investing in social themes, despite prioritizing minimizing negative social impact and advancing positive results . Financial advisors and investment platforms could benefit from supporting these investors, as 58% of global investors say they would likely select an advisor or platform based on their sustainable investment offerings .

Conclusion

The rise of ESG investing has profoundly impacted the investment landscape, driving sustainable practices and aligning financial objectives with broader societal and environmental goals. While challenges persist, such as data availability, greenwashing concerns, and regulatory complexities, the benefits of sustainable investing are undeniable. From enhancing long-term financial performance to promoting positive social and environmental impact, ESG integration offers a comprehensive approach to risk management and value creation.

As technological advancements, policy changes, and market growth continue to shape the future of sustainable investing, it is clear that this approach is no longer a niche consideration but a fundamental aspect of investment decision-making. Investors, companies, and stakeholders alike must embrace transparency, accountability, and a genuine commitment to sustainability to capitalize on the opportunities presented by ESG investing and contribute to a more sustainable and equitable future.

FAQs

1. How does ESG contribute to sustainability?
ESG (Environmental, Social, and Governance) contributes to sustainability by evaluating companies on their environmental stewardship, social responsibility, and governance practices. Investments that prioritize these criteria support sustainable business practices and long-term value creation.

2. What is sustainable investing and its relationship with ESG?
Sustainable investing involves making financial decisions that consider environmental, social, and governance (ESG) factors. It focuses on investing in companies that manage their environmental impact, engage positively with society, and practice good governance, all of which are crucial for sustainable development.

3. What is the usefulness of ESG ratings for sustainable investors?
ESG ratings are valuable tools for sustainable investors, including institutional investors and asset managers. These ratings help in assessing a company's alignment with environmental, social, and governance values, aiding in risk management and supporting long-term investment strategies. Banks and insurers also use ESG metrics to guide their financial decisions.

4. What role does ESG play in an investment strategy?
In an investment strategy, ESG criteria assess how a company's operational practices and policies might affect its profitability and future financial returns. Unlike Socially Responsible Investing (SRI), which focuses strictly on aligning investments with an investor's personal values, ESG considers broader performance factors that impact corporate success and sustainability.