August 28, 2008
ESG Criteria Creeping Slowly into Mainstream Investing
by Anne Moore Odell
New report lays out the five hurdles ESG investing has to clear before it can be incorporated on a
There still isn't enough long-term data about the impact of environmental, social and governance
(ESG) criteria on investments finds the report, "Environmental, Social Governance:
Moving to Mainstream Investing?" Yet more and more mainstream financial institutions are
developing ESG frameworks and are assessing the impact of these ESG frameworks on returns.
Published by the nonprofit business association Business for Social Responsibility (BSR), the report explores whether or not mainstream
investment firms are incorporating ESG criteria as part of their overall investment analyses. The
report then looks at when ESG is not part of mainstream investments and explores some of the
potential reasons why not. The report was written by Anu Yegnasubramanian as part of the Advanced
Policy Analysis project at the Goldman School of Public Policy at the University of
By completing a review of reports--such as "PRI Report on Progress 2007" findings from the United
Nations Environment Programme Finance Initiative (UNEP FI), ESG frameworks from mainstream
financial institutions, and by considering a summary of perspectives shared during a series of
interviews, BSR's report summarizes what is happening currently in mainstream financial
institutions in regards to ESG issues. The report then looks at both the stumbling blocks to ESG's
progress and offers solutions to removing these blocks.
The most important sign of ESG's
impact is the out performance of investments that use ESG criteria against an accepted baseline the
report concludes. However, ESG criteria and studies on its effects on returns suffer from a lack of
data over time, as most data on ESG criteria doesn't extend very far into the past, certainly not
the ten years most analysts look at.
"Goldman Sachs' GS Sustain Focus List, which predicts
the top corporate performers primarily by evaluating how well they integrate ESG criteria into
their businesses, has outperformed the world stock index MSCI by 25% since August 2005," said Laura
Commike Gitman, director of Advisory Services for BSR.
The report lays out five barriers
to mainstream investing adopting ESG criteria and suggests possible solutions for breaking down the
barriers. The first barrier to ESG going mainstream is the lack of data and financial information
on the effects of ESG for the long haul.
"I believe that companies and investors need to
shift attention from quarterly earnings guidance to investments and management decisions that focus
on the long term growth and sustainability of the company," Gitman said.
author suggests offering incentives for institutions completing long-term research on the
incorporation of ESG criteria onto returns. By using well-known market effects models, mainstream
investors can place ESG criteria in a larger context.
Insufficient reporting of ESG data
is another barrier to integrating ESG criteria into mainstream investing. Although more companies
are publishing corporate social responsibility (CSR) and sustainability reports, the information in
the CSR reports, from company to company, varies widely. BSR's report suggests that governmental
regulations on CSR reporting and mandatory ESG reporting by companies could help address this
The third barrier to the inclusion of ESG criteria into the mainstream is the
focus on short term investing. A shift in the investment culture would need to take place to move
investors to think about the long-term. Gitman points to the Aspen Institute's report "Long- Term Value Creation:
Guiding Principles for Corporations and Investors" as a great resource for investors looking at
longer lasting investments.
Investment professionals need to build capacity regarding ESG
criteria the report lists as the fourth barrier to change. The report reads: "conversations with
investment professionals in niche sustainability financial institutions portray a similar picture
of mainstream investors as being primarily trained to assess fundamental financial data and not
fully equipped to analyze ESG criteria."
The solution is the education of current
investment professionals and the inclusion of ESG issues and awareness at the college level.
Financial institutions could also purchase ESG ratings to help build capacity.
barrier to the inclusion of ESG criteria into the mainstream is the mindset and cynicism of
mainstream investors. Cynicism can be beaten in a number of ways, most importantly, by showing that
including ESG considerations improves the bottom line. By talking with many different stakeholders,
new perspectives can be gained and distrust of ESG criteria lost.
"SRI is often seen as a
separate type of investment that is focused on the dual goals of both financial and
social/environmental impacts," concluded Gitman. "For ESG criteria to become integrated into all
investments, investors need to believe that these dual goals are inextricably linked. How
companies manage their ESG performance is a strong indicator of a company that is well-managed
overall, one that will achieve superior financial performance over the long-run."