Confusion on Sustainable and ESG Terminology

Sustainable investment strategies in the US alone grew by 42% from 2018 to 2020. But while the growing acceptance of these strategies has been impressive, confusion still persists about what exactly constitutes ESG or sustainable or responsible investing, how it informs investment decisions and its potential impact on returns.

A UBS report found that 79% of individuals are confused over terminology. The same report found that 82% of investors believe the returns of sustainable investments will match or surpass those of traditional investments. The rationale is simple; they view sustainable companies as responsible, well-managed and forward-thinking, making them good investment prospects.

Investors are in need of a global system with which to measure ESG. In the US, standards from the Sustainability Accounting Standards Board, or SASB, identify the subset of ESG issues most relevant to financial performance in each of 77 industries. International investors with upward of $72 trillion in assets have endorsed those standards, as well as the Task Force on Climate-Related Financial Disclosures (TFCD).

In Europe, major legislation came into force in March of this year, based on the Sustainable Finance Disclosure Regulation (SFDR), introducing a classification system with new disclosure requirements for investment products.

All of these initiatives and regulations will take time to become fully operational. What is clear is the direction of travel for markets, companies and fund providers is inexorably towards ever greater levels transparency and accountability.