Investors have been tracking a rising tide of data that relates broad environmental and social concerns with the financial performance of companies.
A recent boom in empirical studies has also correlated environmental, social and governance (ESG) aspects to stronger management techniques, better financial performance and stock price benefits in the short, medium and long terms.1 The reasons for these correlations are less clear, however, and they vary by sector, region and even individual company. The result is that investors can be reasonably sure that consideration of ESG factors is important for a smart investment strategy, but the specific ESG factors that should be tracked are unknown.2
A survey of almost 100 investors reveals a significant and accelerating commitment to better understand climate change risks in the financial disclosures of companies. This commitment has taken shape through support for the Task Force on Climate-related Financial Disclosures (TCFD). We asked investors about expectations arising from the TCFD and found:
- Investors have become a significant voice in the call for climate change risk disclosure.
- The timeline for investor expectations on climate change risk disclosure are shorter than many companies might expect.
- There is a strong appetite amongst investors for disclosure in mainstream financial reports.
- There is extensive movement by regulators and standards organizations around the world to meet this investor demand.
In this paper, published by The Yale Center for Business and the Environment and ERM, you will learn more about the rise of ESG investing, the guidance put forth by the TCFD and common elements across resources that companies will likely need to address when adopting the TCFD recommendations.
1 Friede, G., Busch, T., & Bassen, A. (2015). ESG and financial performance: aggregated evidence from more than 2000 empirical studies. Journal of Sustainable Finance & Investment, 5(4), 210-233.
2 Esty, D. and Cort, T. (2017) Corporate sustainability metrics: what investors need but don’t get, Journal of Environmental Investing, (8) 1.