The abbreviation ESG was first used in a 2004 report published by the United Nations called Who Cares Wins, which argued that the consideration of specific environmental, social and governance factors in investment decisions could have a positive impact on society as well as the financial markets. Since then, it has come to represent much more than a set of investment criteria. At Deutsche Bank Wealth Management, we regard it as a statement of ambition for the world as it should be, if the power of finance can be channeled to support the broader objectives of society.
There are various investment possibilities by which ESG goals can be achieved. These include screening investments based on ESG factors such as the ones listed below; the use of investment vehicles designed to achieve specific ESG objectives, such as ‘green bonds’; and making direct investments in companies that aim to have a positive impact on particular ESG issues.
Choosing an ESG investment involves weighing up the various financial and ESG considerations, to ensure it fits with your overall strategy. Ultimately, your ESG investing strategy will be unique to you, making it vital to choose an investment partner that understands your specific ESG aims.
Example ESG factors
The evolution of ESG investing
Over the past decade, ESG investing has evolved considerably and entered the mainstream. Recent research suggests that an estimated $30.7 trillion is now invested based on ESG principles*. However, the idea of screening investments based on ESG factors is not new. Indeed, the key moments in its evolution date back several centuries:
German mining official and forestry expert Hans Carl von Carlowitz pioneers sustainable conservation with the warning: "Don't fell more trees than can grow back."
German scientist Alexander von Humboldt notices that the Valencia lake in Venezuela has started drying up after nearby woodlands were felled to obtain arable land.
Launch of first recorded "responsible" investment vehicle, the US Pioneer Fund, which declines investments in alcohol and tobacco industries due to their negative effect on human health.
United Nations conference in Stockholm on the human environment first discusses the trade-offs and challenges of sustainability, economic growth and development.
Two UN agencies publish a paper co-authored by the World Wildlife Fund (WWF) entitled "Living Resource Conservation for Sustainable Development".
Domini 400 Social Index becomes the world's first "socially responsible" stock index, aimed at helping socially conscious investors weigh social and environmental factors in their investment choices by providing them with a benchmark.
The abbreviation ESG is first used in a report published by the UN Environment Programme Finance Initiative.
UN launches "Principles for Responsible Investment," which is backed by the world's largest investors.
Adoption of the Sustainable Development Goals (SDGs) by 193 countries of the UN General Assembly. The Paris Agreement establishes a new framework for greenhouse gas reductions.
Approximately $31 trillion of assets across five of the world's major markets are invested based on ESG principles*.
*Source: Global Sustainability Investment Alliance, http://www.gsi-alliance.org/wp-content/uploads/2019/03/GSIR_Review2018.3.28.pdf
Opportunity on a global scale
The United Nations’ Principles for Responsible Investment (PRI) were developed in 2006 to incorporate ESG principles into investment practice.
When the UN Sustainable Development Goals (SDGs) were launched in 2015, they helped to provide targets for these principles: 17 goals designed to shape a sustainable future.
Since then, various national and international initiatives have underlined the scale of investment opportunity created by these targets. For example, in 2017 a group of central banks and supervisory bodies from around the world formed the Network for Greening the Financial System, with the aim of mobilizing capital for green and low-carbon investments. And in 2018 the European Commission announced it would set a target for the European Union to go carbon-neutral by 2050 – by aligning industrial policy, finance and research and investing heavily in technology.
According to a study by the Business and Sustainable Development Commission, achieving the SDGs could potentially create opportunities worth an estimated $12 trillion by 2030.
At Deutsche Bank, we have committed ourselves to the Paris Pledge for Action, and are formal supporters of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations to develop a consistent approach to climate-related financial risk disclosures to be used by companies when providing information to investors, lenders, insurers and other stakeholders. We continue to develop our approach to climate risk assessment and management, and are working to further align our disclosures in line with the TCFD recommendations, including via participation in industry working groups to close gaps.
Why ESG investing doesn’t have to mean compromising on returns
Investors are increasingly being asked to take responsibility for the impact their investments have on the real world. In April 2019, for example, the World Wildlife Fund (WWF) published its own guidelines for investing based on ESG factors.
Yet companies that score highly on ESG criteria often provide more sustainable, long-term revenue streams and mitigate risk through responsible practices. Taking ESG factors into consideration can help to unlock unrealized value, and is therefore becoming an increasingly compelling way to invest.
Learn more about ESG investing and how we can help here
Source: United Nations Environment Programme – Finance Initiative, https://www.unepfi.org/fileadmin/events/2004/stocks/who_cares_wins_global_compact_2004.pdf
Source: Business and Sustainable Development Commission, http://report.businesscommission.org/uploads/Executive-Summary.pdf