Companies need to take account of their wider impact on society if they wish to attract investors.
New research commissioned by HSBC shows that the majority of large investors now take environmental, social and governance (ESG) issues into account when deciding where to place their funds. This appears to be an accelerating trend, as shown by the rise of ESG ratings agencies.
Sixty-one per cent of institutional investors have an ESG strategy that they use to guide their investment decisions, according to the survey of more than 1,700 major global investors and businesses that issue corporate debt.
A focus on ESG issues can drive financial returns
Businesses are also recognising they need to take further steps in this area. Nearly 50 per cent of the businesses surveyed had their own ESG strategy. Many commit to measuring and managing their impact on people and the planet, and provide information about areas such as their carbon emissions, labour conditions, and relationships with communities.
Investors and companies are recognising that embedding good ESG practices into their activities is not merely the right thing to do, but also makes good business sense. Both said the main reason why they were focusing on ESG is they believe this will help improve financial performance. This shows a change in their motivation compared with previous HSBC studies, which suggested that pressure from regulators was the biggest driving factor.
Daniel Klier, Group Head of Strategy and Global Head of Sustainable Finance, HSBC, said: “Investors now firmly believe that a focus on ESG issues can drive financial returns, which is encouraging them to change their behaviour. Put simply, ESG, climate finance and risk management are moving mainstream.”
Clear definitions needed
However, there remains much more to do – with the survey showing that more than half of companies don’t have an ESG strategy.
Some organisations say they hold back from increasing their commitments because of a lack of clear definitions about what they should measure and disclose. The profile of ESG investing has risen rapidly over recent years, but there are still relatively few established market standards. This means that while many big companies recognise investors want more information on ESG performance, they are unsure exactly what they should be providing.
Initiatives such as the Task Force on Climate-related Financial Disclosures (TCFD), supported by HSBC, may be part of the solution. In 2017, the TCFD published a set of consistent global recommendations on how companies should measure and report on the risks they face from climate change. Yet only 8 per cent of big companies and 10 per cent of investors are aware of these recommendations, the survey found.
Mr Klier highlighted the inconsistency of definitions as a major issue, and added the bank strongly backed the TCFD recommendations.