Use of environmental, social and governance criteria has grown steadily among socially responsible investors for the past 20 years, but several obstacles have impeded widespread use in the mainstream, according to a new report from the group
Business for Social Responsibility (BSR).
The 27-page report —
"Environmental, Social and Governance: Moving to Mainstream Investing?" — examines how mainstream financial institutions are incorporating environmental, social and governance criteria, the barriers that are preventing broader use of such principles, and possible solutions to the challenges.
There are five major reasons why criteria for environmental, social and governance (ESG) haven't made deeper inroads in the broader investment community. Cynicism is chief among them, the report says.
"Investors and businesses need to approach ESG with a different mindset, which may mean departing from business as usual," BSR said in announcing its report yesterday.
According to the report, the other major barriers are a scarcity of data linking ESG criteria to financial returns, insufficient reporting of the data that does exist, the dilemma presented by the demand for short-term financial performance and the long-term nature of ESG investments, and a relatively small population of investment professionals who are trained to evaluate ESG investments.
"Although many studies, such as those by the United Nations Environment Programme Finance Initiative (UNEP FI), show a positive association between investors' use of ESG criteria and enhanced financial performance, the data is still inconclusive, and mainstream investors remain skeptical," said Laura Commike Gitman, the BSR director for Advisory Services.
On a related front, direct pressure on companies by investors is growing increasingly successful in shaping environmentally and socially responsible corporate policy and practices, according to the investors and environmentalists group
Ceres.
For example, investors who engage with U.S. firms on the financial risks and opportunities from climate change achieved breakthrough results during the 2008 proxy season, Ceres said yesterday. According to the group, a record 57 climate-related shareholder resolutions were filed with U.S. companies, and almost half were withdrawn after the companies agreed to positive climate-related commitments.
"Growing investor pressure is prompting more companies to see the value of making environmentally sound products," Ceres President Mindy S. Lubber said in a statement. "By re-thinking their strategies with high energy prices and climate change in mind, these companies will have a distinct competitive advantage in the years ahead."
