Published on 22 October 2018

SUSTAINABLE FINANCE

ESG integration : a question of financial profitability

The integration of ESG criteria in investment vehicles is becoming increasingly common for companies and investors worldwide, according to an East and Partners study commissioned by HSBC. For investors, ensuring the financial profitability of their portfolios is of the utmost importance.

Ecolabel europeen Pogonici
Widespread use of ESG criteria is mainly explained by the search for financial profitability and tax incentives.
@Pogonici

61% of investors and 48% of companies worldwide have implemented a strategy integrating ESG (environmental, social and governance) criteria. These are the findings according to a study commissioned by HSBC and conducted by East and Partners, which included 1,731 companies and institutional investors.

Significant regional disparities

Europe has seen the largest wave of ESG integration. 85% of investors operating on the continent have included an ESG grid in their investment policy, compared to 40% of investors in Asia. This gap is even larger amongst companies: 87% of companies with more than $10 billion in sales use an ESG prism in Europe compared to only 13% in Hong Kong.

The United States is currently positioned at the middle of the table (21%). But this position could fall due to a government directive issued in April that excludes the consideration of ESG criteria in investment decisions concerning pension funds. They are considered incompatible with the fiduciary duty and and are seen as a potential source for new litigation.

ESG decsion making drivers HSBC

In search of financial profitability

Widespread consideration for ESG integration is explained by investors’ quest for financial profitability and tax incentives. In return, investor pressure is increasingly encouraging companies to adopt this ESG approach, particularly to improve their communication in this area.

Investors now firmly believe that a focus on ESG issues can drive financial returns, which is encouraging them to change their behaviour" said Daniel Klier,Group Head of Strategy and Global Head of Sustainable Finance, HSBC.

Lack of coherence, the greatest challenge

If 100% of investors and companies do not follow the ESG trend, it is because there are still barriers to adopting such strategies. The greatest barrier is the lack of coherence in defining ESG criteria. Another obstacle is the lack of investment opportunities," aggravated by the poor quality of the data produced".

Concerning climate risks, for example; issuers and investors recognise the importance of having a coherent set of criteria via international regulations to improve communication in this area. Whether or not the work from the Task Force on Climate-related Financial Disclosures (TCFD), goes in this direction remains largely unknown. Currently, less than 90% of companies and investors report on this type of initiative.

Béatrice Héraud @beatriceheraud

 

"Sustainable Financing and ESG Investing Report", September 2018, HSBC Study conducted by East and Partners


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