ESG and Responsible Investing

What are the criteria around ESG investing?

Environmental, Social, and Governance (ESG) criteria are used by investors to evaluate companies and gain insight into how socially and environmentally conscious their activities are to help inform investment decisions. These criteria help investors to evaluate if their values are matched by the companies they are invested in. ESG investors analyze data on three factors:

  • Environmental criteria consider how a company performs as a steward of nature. Examples of environmental criteria can include climate change, energy emissions, waste management, and more.
  • Social criteria examine how a company manages relationships with employees, suppliers, customers, and the communities where it operates. Examples can include human rights, diversity, labor standards, health and safety, and more.
  • 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 agendas of investors, companies, and policy makers.

ESG investing played an increasingly important role as wealth began shifting from Baby Boomers to Millennials, as younger generations expect more from the companies they invest in. The start of 2020 was the turning point for ESG investing, as the COVID-19 pandemic showed investors the correlation between what happened to society and its implications for the global economy.

With this mindset shift, instead of simply stating that sustainable investing is important to companies, they now need to demonstrate what they are doing in these focus areas. In early 2022, the SEC proposed major new disclosure requirements which will require a domestic or foreign registrant to include certain climate-related information in its registration statements and Exchange Act annual 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 each of the three criteria are important on their own, together they indicate an organization’s dedication to achieving the greater good, the wellbeing of the planet, and the rights of people have become a priority among investors.

How does Clearwater help?

Clearwater builds and maintains hundreds of connections to managers, custodian banks, order management systems and third-party security master data vendors, including external ESG providers. Internal ESG ratings and engagement data can be added to provide a central data solution to support ESG-related requirements.

This aggregated and reconciled multi-asset data with the inclusion of the 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 accounting data, compliance monitoring, performance metrics, and risk analytics.

Clearwater’s compliance module offers additional ESG oversight and monitoring against mandate rules and exclusion policies. Clients can maintain watchlists and create custom ESG limits at both instrument and portfolio level.

With increasing inflows of funds 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.

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