In the end, and most importantly, the increasing inclusion of ESG in decision-making processes affects the portfolios of funds and mandates. This effect varies by asset class, sector, and region. In some segments, data quality is a big issue, and understanding actual sustainability risks and opportunities in combination with traditional financial analysis is the right way to go. Therefore, it is important to work with specialized data providers while retaining the ability to cross-check and test the plausibility of both data and results. In line with a consistent and comprehensive ESG framework in which some segments are entirely excluded from sustainable portfolios. On the active ownership side, companies are influenced to take a more sustainable direction and transparency is writ large, e.g. via dedicated ESG reporting.
The most profound effect has been seen in the emerging market space. These markets have lower levels of transparency and are institutionally less stable than their more developed counterparts. Under these conditions, the inclusion of ESG criteria in investment decisions is an invaluable tool to determine the quality of a company’s leadership, its risk structure, and the solidity of its business model. While the phenomenon of ESG improving the quality of a portfolio is significant almost across the board, it is most visible in the emerging markets, which can be seen in the performance of sustainable emerging market equity indices compared to their traditional parent indices.
At this point, the question is no longer: Can I afford to invest sustainably? It is: Can I afford not to? And the answer is no. Both because of the environmental, social, and governance problems facing global society, and because investors want a solid return on investment.