Environmental, Social and Governance – New Working Group

The Passion Project (PP) is keen that its methodology encapsulates national and international best practices. In keeping with that theme, it is careful to ensure that its operation is embraced by all sectors and its adoption is understood to be that of a tool that adds value.

In pursuit of this goal, the PP team have worked to align the interest of all parties and to embed business solutions and operational efficiencies into the design process. The establishment of a new impact framework to support its evidence gathering and impact reporting is aligned with the objectives of those outlined in the operation and adherence to “ESG” investing by those in the business and financial marketplace.

ESG is an acronym for Environmental, Social and Governance. Funds with this prefix exist to make investments in listed companies that are expected to support and contribute to pre-determined ESG goals that are environmentally friendly and benefit society whilst demonstrating good governance.

The global rise in investor interest in ESG funds can be seen in the extract below published by CNBC news in Sept 2020 – full article here https://www.cnbc.com/2020/09/02/esg-index-funds-hit-250-billion-as-us-investor-role-in-boom-grows.html

Socially conscious investing continues to gain momentum as Covid-19 and the destruction left in its wake spark interest in stakeholder capitalism — the idea that a public company’s focus shouldn’t only be generating profits to reward shareholders without taking the bigger picture into account.

With investors increasingly favouring ESG stock selection — when a company’s environmental, social and governance policies are considered alongside more traditional financial metrics — more impact investing funds are launching to keep pace with demand.

Both the number of sustainability-focused index funds and their assets have doubled over the past three years, according to a report from Morningstar released in September 2020. The financial research firm said that as of the end of the second quarter of 2020, there were 534 index funds focused on sustainability, overseeing a combined $250 billion. In the U.S., which has lagged Europe in ESG investing, assets in sustainable index funds have quadrupled in the last three years and now represent 20% of the total.

Actively managed ESG funds continue to attract the lion’s share of dollars and represent a much larger portion of the sustainable investing landscape. Combined inflows into both active and passive ESG-focused funds reached $71.1 billion during the second quarter, pushing global assets under management above the $1 trillion mark for the first time.

Alex Bryan, Morningstar’s director of passive strategies research for North America, pointed to the coming $30 trillion wealth transfer from baby boomers to their millennial and Gen X children as one of the factors that will spur long-term growth in sustainable funds.

According to a recent survey conducted by Morgan Stanley’s Institute for Sustainable Investing, nearly 95% of millennials are interested in sustainable investing, while 75% believe that their investment decisions could impact climate change policy.

Unfortunately, there is growing awareness in the investment and savings market that ESG Funds are struggling to achieve appropriate ESG related ‘outcomes’ to evidence their success in making appropriate ESG related investments. Indeed, they are receiving many investors and public criticism for perceived underachievement in selecting appropriate investee companies, which in turn have failed to contribute as promised to ESG principles that secured the initial investment.

Unlike other impact investment products such as Social Impact Bonds (SIBs), they do not have the baseline validation standards, fixed commercial values, and audit requirements that support the SIB’s delivery criteria and impact success.

Unfortunately, it is not possible under existing ESG Fund investment criteria for ESG Funds to invest in/fund directly SIBs for a ‘return’, but in making investments in listed companies seeking an ESG designation, there would be an all-round beneficial uplift in results and impact, if ESG Fund investment policies adopted a similar set of ‘outcome’ criteria that match those embedded in SIBs proposed by the Passion Project.

The Passion Project, the Foundation, and academics from its Centre of Excellence are seeking to collaborate with ESG fund managers and forward-thinking corporates keen to attain ESG investment status. The intention is to establish a series of initiatives that can support raising awareness and industry standards in the creation, delivery, and measurement of impact.

The team intends to use their experience in establishing Social Impact Bonds to help develop a range of ideas for evaluation. Suggestions for review thus far include the creation and delivery of appropriate CPD qualifying education and training programmes, the establishment of an industry-approved index, qualifying CSR programmes and a recognized company kite mark with an accompanying membership programme and a publicly available register. These could be used to benefit all parties; investors, fund managers, and company directors- to help clarify requirements, manage expectations, and give certainty as to standards.

This activity is gathering significant momentum from the investment industry. If you would like to speak to someone about this initiative, please contact us using the contact link found below.

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