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Investing in the environmental, social, and governance (ESG) area first came into prominence in 2004 when the erstwhile UN Secretary-General Kofi Annan took the initiative to incorporate ESG into the capital markets.
ESG is on the way to becoming a multi-billion-dollar market.
Different stakeholders such as ESG research firms, data providers, asset managers, rating agencies, and stock exchanges have started to invest heavily in the various components that make up the entire ESG life cycle.
ESG ratings now are essential parameters for institutional investors who intend to de-risk their investments.
We discuss the key industry trends in ESG, the current challenges organizations face, and the possible solutions to address such issues.
The changing face of ESG
This results in greater transparency in corporate decision-making, ESG data trends show.
The ESG market has been growing at about 35%, hitting the $1 billion mark in 2021. Some of the emerging trends in ESG are:
Leveraging ESG is not all that simple
Despite all these new growth trends, investment management firms must cover much ground to realize the full potential of ESG incorporation.
The challenges include:
Effective ESG implementation needs collective effort
Governments can align regulations to meet the goals of the Paris Agreement, while ESG framework bodies can create a blueprint for unifying global reporting standards. Primary stakeholders include organizations who need to step up their ESG performance. It also incorporates rating agencies and data providers who need to converge to expected standards and increase their coverage by manifolds. The public needs to be made more aware of the long-term impact of their choices.
The IT sector has an important role to play in this ecosystem. Potential solutions include:
For organizations in general:
For rating agencies and data providers:
For public awareness:
Public domains increasingly become substantial information repositories, making information access easy for end-customers and investors. Therefore, the onus of providing accurate ESG information rests on each organization. Lack of information may potentially be perceived as ‘insensitivity’ on the company’s part. Inaccurate information or misrepresentation is even worse as it may lead to serious and irreparable reputational damage.