ESG and Responsible Investing

What are the criteria around ESG investing? 

Environmental, Social, and Governance (ESG) criteria are vital for investors to assess how their investment choices align with their values.   

Environmental criteria consider how a company performs as a steward of nature. Examples of environmental criteria can include greenhouse gas emissions, biodiversity loss, and waste management. 

Social criteria examine how a company manages relationships with employees, suppliers, customers, and the communities where it operates. Examples can include human rights, diversity, health and safety, and labor standards. 

Governance deals with how a company is governed and includes leadership, executive pay, audits, internal controls, and shareholder rights. 

Why is ESG investing criteria important to consider? 

ESG investing is quickly gaining popularity as investors become increasingly concerned about climate change, social justice, and more. ESG topics are rising to the top of the agenda for investors, companies, and policy makers.  

With this mindset shift, instead of organizations simply stating that sustainable investing is important to them, they now need to demonstrate what they are doing. In March 2024, the SEC adopted new climate disclosure requirements which will require domestic and foreign registrants to include certain climate-related information in its registration statements and periodic reports. 

At Clearwater, we are seeing this paradigm shift firsthand. We polled nearly 200 investors representing over $12 trillion in AUM to gain insights into how ESG investing criteria has become part of the investing framework. In our poll, ESG Survey: Adoption of Responsible Investing, we found that ESG investment policies were adopted by 55% of the respondents surveyed. Additionally, over 68% of executive teams and 74% of investment teams surveyed consume ESG reports on a regular basis. 

While the criteria for E-S-G are important on their own, together they indicate an organization’s dedication to contributing to the greater good by considering the wellbeing of the planet, ensuring human rights and ensuring good governance practices which lead to long-term sustainability. 

What is the difference between ESG investing and socially responsible investing (SRI)? 

ESG investing and SRI have similarities, but both have very distinct investment approaches. ESG investing incorporates environmental, social, and governance factors into investment decisions. This approach aims to consider the impact of companies’ environmental practices, social policies, and corporate governance on their long-term performance and sustainability. On the other hand, SRI focuses on investing in companies that align with specific social or ethical values. SRI investors actively avoid companies involved in industries such as tobacco, weapons, or fossil fuels, and seek out companies that promote social and environmental progress. While ESG investing considers broader sustainability factors, SRI is narrower in its focus on ethical considerations.  

Why are ESG KPIs important for companies? 

ESG KPIs (key performance indicators) help companies track their progress in sustainability and responsible practices, and are often used by investors, stakeholders, and rating agencies to assess a company’s ESG risks, opportunities, and performance. ESG KPIs can vary based on industry and company objectives. 

How can you track ESG KPIs using software? 

Tracking ESG KPIs involve collecting relevant data, setting targets, and monitoring progress. It requires a robust and integrated data management system and clear data collection procedures to ensure accuracy and reliability. 

How does Clearwater Analytics help? 

Clearwater builds and maintains hundreds of connections to managers, custodian banks, order management systems and third-party security master data vendors. 

Aggregated and reconciled multi-asset data with the inclusion of ESG data provides a centralized book-of-record that maps ESG ratings directly to security master data. It supports a personalized approach to both high-level and in-depth portfolio views incorporating the portfolio book-of-record and accounting data. 

With increasing inflows into ESG-related products and growing regulatory interest, new ESG data providers will appear, others will be acquired, further regulations will be imposed, and clients will demand further insights and restrictions. 

Learn more about how Clearwater Analytics can help with investment accounting and reporting by scheduling time to speak directly to an expert.