Global AI

ESG investing: costs to being good or is it just in the data and portfolio construction?

The debate over ESG investing largely fall into two categories: which ESG reporting standards to use and whether ESG investing is overhyped and oversold. Both are focusing on the wrong things.

Firstly, UN Sustainable Development Goals (SDGs) are what matter. The SDGs have more factors and address the full spectrum of global macro systemic issues that matter to all stakeholders, all businesses and all countries. UNCTAD’s Global Core Indicators (GCIs) address all of these issues. Over 100 countries already have endorsed the GCIs and are encouraging their constituent companies, both large and small, to report under these standards. The GCIs were created through a four-year, multi-stakeholder effort by governments, regulators, standard-setting agencies, investors and the Big 4. The International Integrated Reporting Council (IIRC) and the World Business Council for Sustainable Development (WBCSD) endorse and support the Global Core Indicators. The World Economic Forum-led ‘Towards Common Metrics’ initiative largely are UNCTAD’s Global Core Indicators. It is time for standard setters to come together and support the universality of UNCTAD’s GCIs if we are really interested in sustainability reporting and not winning the contest on who has a ‘better mouse trap.’

Secondly, the controversy around ESG investing raising the question of the ‘costs to being good’ arises largely because of the poor quality of the data but also due to the portfolio construction. ESG funds frequently exclude companies based on various criteria, which can create conflicts with fiduciary duty. Most times ESG investing is based on a narrow lens primarily based on carbon emissions, which is just one of the many factors that can impact society.

SDG investing does not seek to exclude any company but instead measures their impact to society across a variety of angles. This means that while the ESG approach reduces investment flows to sectors such as the oil industry, an AI-driven SDG approach can be used as an objective investment tool for the assessment of non-financial risks and can help identify positive and negative spillover effects that go far beyond the narrow ESG lens of carbon emissions. The fact that SDGs are an emerging standard applicable to investments at the corporate, infrastructure, and sovereign levels, makes it a powerful alternative to traditional ESG investing. Moreover, it can enable investors to optimize the risk-return-impact profile of their portfolios as our research, Sustainable Investment – Exploring the Linkage Between Alpha, ESG, and SDG’s a ‘TOP TEN’ listed Social Science Research Network (SSRN) paper, shows.

From a societal perspective, building a framework which measures the net SDG contributions of entities can potentially incentivize public corporations and investors to mobilize capital towards achieving the SDGs contributing to long-term economic growth and shared prosperity for all.

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