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  • Directors' Institute

How do investors evaluate ESG?

ESG investing is a sea of opportunity, but it is sometimes rife with storms of conflict and confusion. As a result, determining how investors appropriately assess ESG is difficult.

Boards can become entangled in the midst of this instability, striving to locate the perfect niche for money, which typically deters investor enthusiasm.

The key is to learn as soon as possible what investors are looking for. As a result, your organisation will avoid the double impact of chasing potentially dead leads while also missing out on important chances.


What exactly is ESG investing?


Let's start with the fundamentals and examine three key concepts:

What exactly is ESG? It is a collection of guidelines that governs corporate activity on environmental, social, and governance issues.

What exactly is ESG investing? These standards are used in decision-making in the investment sub-sector.

What exactly is ESG reporting? It is publicly available data that summarises an organisation's ESG impacts. The major benchmarking instrument for investor research and decision-making is reporting.

Because of the combined pressure from shareholders, customers, and governments, ESG investing is becoming a prominent concern.


Why is ESG investment crucial for boards of directors?


There are three reasons for this:

  • ESG investing is thriving. According to a Bloomberg Intelligence analysis released earlier this year, the worldwide value of ESG assets is likely to exceed $50 trillion by 2025.

  • This, combined with the ESG's growing importance in the minds of stakeholders, makes the topic far more difficult to dismiss in day-to-day business.

  • Because boards play a critical role in determining company strategy, ESG will naturally dominate their activities.


What do ESG investors seek?


Unfortunately, there is no simple or all-encompassing answer. It varies according to the year, country, industry, business size, and environmental impact.

However, we can provide some broad responses to establish the framework for successful investment.


A well-defined, comprehensive plan

ESG investors, of course, want to see an ESG plan, but there are good and bad instances of strategy in business. The distinction, particularly for ESG, is integration.

If a corporation has a separate ESG strategy, this is often bad news for the investor. To them, it appears that the corporation regards ESG as a separate endeavour from core operations.

This is not what investors want. They want ESG to be fully integrated into the company's overall strategy.

If the organisation implements this integration successfully, it will demonstrate that it regards ESG as a critical component of its business strategy.

That it understands how to prosper while embracing ESG

With its integrated ESG goals, it is still sustainable.


A leader in the industry

Investors will always undertake industry comparisons, and ESG is no exception.

When investors compare companies with similar sizes and commercial ambitions, they will look for those who stand out as ESG leaders.

They will look for integrated strategies, experience at the management and board levels, and a public commitment to ESG concerns.

ESG scores are a great method to quantify this. In the absence of a universal standard, there are several score kinds, therefore doing well in at least one of them is advantageous.


Reporting that is strategic

Because it is how corporations convey their progress, reporting is an important factor in the ESG realm.

Firms can use reporting to monitor impact against goals, highlight what has gone well, and explain how they plan to solve deficiencies.

Importantly, it is how investors evaluate ESG impacts, therefore they will want high-quality reporting that shines with consistency and clarity so that they can see a path to ESG success.

Again, there is no consistent reporting template, which continues to annoy people. However, as standardisation progresses, the ambiguity gap is reducing. The EU, for example, has lately made significant progress towards harmonising reporting practises through SFDR and similar rules.

For the time being, keep in mind that investors will desire clear and simple reporting for comparative purposes.


In conclusion, how do investors evaluate ESG? They don't want any fuss or difficulties, but they do want outcomes that can be verified.

When communicating with investors, be clear about your company's ESG goals, how they fit into corporate strategy, and how you plan to communicate this in the medium/long term.


Our Directors’ Institute- World council of Directors can help you accelerate your board journey by training you on your roles and responsibilities to be carried out in an efficient manner helping you to make a significant contribution to the board and raise corporate governance standards within the organization.

Our ESG Expert certification will help you to amplify your understanding of corporate governance in a detailed manner paving a way for you to become a globally recognized ESG leader.

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