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ESG and Investment Strategies Amid an Evolving Regulatory Landscape

Published Date

This article was recently published in Excelencia Empresarial by Mariana Icedo on June 28th, 2024, where she explores ESG's impact on investor strategies and trends.

Navigating the intersection of ESG and investments in an evolving regulatory environment 

It’s no secret that the topic of ESG has sparked diverse opinions and debates in the past few years. Nevertheless, 2024 is witnessing an important turning point in the ESG regulatory landscape, with the EU’s Corporate Sustainability Reporting Directive (CSRD) coming into effect January of last year and the first companies set to report in 2024; the International Sustainable Standards Board (ISSB) issuing its voluntary global sustainability disclosure standards while assuming control of the TCFD; and the US Securities and Exchange Commission’s (SEC) 2024 regulatory agenda which includes its proposed climate disclosures regulations, to name a few1.

CSRD disclosure requirements expand on previous reporting directives by requiring detailed ESG reporting from a broader range of companies. While it primarily targets companies operating within the European Union, its effects ripple globally, impacting companies across the Americas.

How does ESG impact investment decisions and trends?

In parallel, we see a rapidly growing share of investors globally shifting focus from strategies solely driven by financial returns to ESG integration and performance. That said, the integration of CSRD disclosures with the Sustainable Finance Disclosure Regulations (SFDR) is crucial. CSRD disclosures will set asset managers on the right path to meet their reporting obligations under SFDR, promoting transparency for investment product’s alignment with investors’ sustainability preferences. This alignment is particularly important as it allows for more accurate assessment of the sustainability impact of investments, thus improving risk management and promoting sustainable investment products.

A study by Harvard Business School showed that companies with superior performance on material ESG issues and concurrently inferior performance on immaterial ESG issues appear to outperform their peers2. This has resulted in a growing popularity of sustainable investing in past years. As reported by Morningstar, in the first quarter of 2024, the global universe of sustainable funds attracted nearly USD 900 million of net new money3. A survey of 300 U.S. asset manager firms conducted by Bloomberg and Morgan Stanley showed that three in four survey respondents report that their firms have adopted sustainable investing4.

A white paper by the Morgan Stanley Institute for Sustainable Investing details the findings of a study that compared the performance of sustainable funds to traditional funds from 2004 to 2018 and found that the returns of sustainable funds were in line with comparable traditional funds while offering lower market risk (20% smaller downside deviation than traditional funds)5.

How can companies benefit from voluntary ESG disclosure?

Companies that proactively adhere to reputable standards such as ISSB and/or comply with CSRD, can gain a competitive edge when seeking to attract investors and clients that prioritize an ESG agenda. This can in turn lead to improved market positioning and potentially higher valuations6

Overall, the focus on ESG, and the accompanying regulation, is fostering a transparent, more accountable, and sustainable investment landscape; with investors being better equipped to evaluate the long-term sustainability and risks of their investments, driving a trend toward more responsible and informed investment practices.

Contact us today to start making sustainability work for you by partnering with Schneider Electric.

Contributor:

Mariana Icedo, Sustainability Consultant

Sources

1.      Davies, P., Fortt, S. & Huber, B. (2024). ESG Insights: 10 Things That Should Be Top of Mind in 2024. Harvard Law School Forum on Corporate Governance. https://corpgov.law.harvard.edu/2024/01/30/esg-insights-10-things-that-should-be-top-of-mind-in-2024/

2.      Khan, M., Serafeim, G., Yoon, A. (2015) Corporate Sustainability: First Evidence on Materiality. Harvard Business School Working Paper, No. 15-073. https://dash.harvard.edu/bitstream/handle/1/14369106/15-073.pdf?sequence=1

3.     

 Morningstar (2024) Global Sustainable Funds Flows: Q1 2024 in Review https://assets.contentstack.io/v3/assets/blt4eb669caa7dc65b2/bltc4c7114f9f208d6b/662fe107b000392869b5cb75/Global_ESG_Q1_2024_Flows_Report.pdf

4.      Morgan Stanley Institute for Sustainable Investing (2019). Sustainable signals: Growth and Opportunity in Asset Management. https://www.morganstanley.com/assets/pdfs/2415532_Sustainable_Signals_Asset_Mgmt_L.pdf

5.      Morgan Stanley Institute for Sustainable Investing (2019). Sustainable Reality: Analyzing Risk and Returns of Sustainable Funds. https://www.morganstanley.com/content/dam/msdotcom/ideas/sustainable-investing-offers-financial-performance-lowered-risk/Sustainable_Reality_Analyzing_Risk_and_Returns_of_Sustainable_Funds.pdf

6.      Olynec, N. (2023) Sustainability trends shaping corporate priorities in 2024. IMD https://www.imd.org/ibyimd/2024-trends/sustainability-trends-shaping-corporate-priorities-in-2024/