Climate change is real and is having a sizable, immediate impact on how investments are evaluated. ESG — environmental, social and governance criteria used by investors to evaluate a company’s operations — is what brings sustainability and profitability together in today’s new era of investments. We’re already seeing the result: In 2018, 26% of all professionally managed assets (a value of over $11.6 trillion) were impacted by ESG investment strategies.
Here are the top four things investors need to know about ESG strategies:
1. ESG strategies lower operating costs, including energy, improving asset performance for stakeholders.
2. ESG strategies are correlated with superior asset and general partner performance, helping to attract capital.
3. ESG strategies improve financial performance by driving asset values and promoting limited partner returns.
4. ESG strategies lead to increased resiliency.
A Deep Dive
Until recently, sustainability was considered by the business world as a cost rather than as an asset. However, that narrow thinking is rapidly evolving as investors see the direct links between ESG investing, socially responsible investing (SRI) and improved financial returns. As environmentally friendly alternatives to current capital markets emerge and develop, I advise investors to integrate ESG and SRI strategies when allocating capital to maximize financial returns. ESG can increase property values and fund manager returns through its incentive fee structure (often about a 20% increase in value over a hurdle rate), making it a strategic option with demonstrable financial value.