ESG’s Role As A Market
The first post in this series described what environmental, social, and governance (ESG) is and its significance to businesses today. This post will describe the evolving market opportunities that use “ESG” to describe their market or scope.
ESG has been adopted by three major groups according to their own very specific motivations: the investment community, the services industry, and businesses themselves. These can be described as:
- Investment ESG.
- ESG services.
- Corporate ESG.
The most prevalent usage of ESG in the media or public spaces refers to investment ESG, or ESG for investors. This kind of ESG is entirely focused on using ESG data about a company (or many companies) from a third-party perspective in order to inform investment strategy and particularly the creation and marketing of ESG-specific investment products.
This is a significant market; as of Q4 2021, Morningstar tracks more than 5,900 ESG-focused funds (i.e., funds that use ESG criteria to determine the equities in the fund) with total assets of more than $2.7 trillion USD. This market is driven by institutional investors, such as pension funds and retail investors. For example, Forrester data shows that 12% of all US retail investors own a sustainable investment product (it’s 12% in the UK, too, and 23% in France and 19% in Australia).
And investment ESG is a fast-growing phenomenon; Bloomberg’s analysts predict that ESG assets will represent a third of all assets under management by 2025 ($53 trillion of $140.5 trillion). Groups such as GFANZ (the Glasgow Financial Alliance for Net Zero, with its 450 investment firm members) and PRI (the UN’s Principles For Responsible Investment, with its 1,000-plus signatories) further propel the notion of investment ESG.
Financial services leaders that drive investment ESG say it leads to better, more responsible business and organizes the trillions of dollars in capital needed to fund a transition to a net-zero world. It’s early days, however, and the tools to make ESG for investors a reality are still blunt: ESG ratings are inconsistent and lack transparency, which leads to cries of greenwashing or hypocrisy. An ESG fund may include a weapons company due to unsupervised automation. Or an oil company may earn high ESG ratings for meeting or exceeding ambitious climate promises. Further, investors — driven by a fiduciary duty to generate the highest possible return — often look at ESG data only to understand if a company’s subject to environmental or social risks, not if it’s creating them.
When people in financial services use the term ESG, they’re usually referring to the investment products and the ecosystem around those products (ESG ratings providers and ESG analysts, primarily).
Given the increasing attention that ESG is getting within businesses, managers are looking for help. This is the world of ESG as services.
This ESG-as-services landscape is vast and also growing. It encompasses:
- The accounting firms (PwC alone is investing $12 billion in its offering and 100,000 employees).
- The consulting firms (McKinsey has more than 1,000 partners in its own sustainability institute).
- The law firms (Freshfields has made ESG-related expertise a specialty).
- The credit and ratings agencies (Moody’s, Bloomberg, Sustainalytics, and MSCI, for example).
- The big technology companies (the big ones such as Salesforce, IBM, and Microsoft are prominent, but so are a host of companies in the risk; environment, health, and safety [EHS]; and compliance/reporting spaces).
- The data specialists (Scope3 and Polecat are examples; we did a landscape of these, in fact).
The involvement of the accounting firms is natural, given that the reporting, disclosure, and auditing requirements related to ESG are similar in form to those related to corporate finances (and will soon require external audits, at least in the EU). The rest of the services providers provide the rules and frameworks and capabilities for data management that will underpin the ESG data reporting and help companies rethink their strategies, products, and business model to improve their ESG performance.
While the “ESG services” space takes its name from the kind of data that it has coalesced to manage, this wasn’t traditionally a natural market or organizational construct within their clients’ organizations (until recently). As a result, the buyer of ESG services will often not have an ESG title. Rather, an ESG services buyer will often have a sustainability title, a risk title, a finance title, or some kind of generic strategy title (but the long tail of buyers is truly long, given the range of corporate roles that may have ESG-related needs). The exception here is with investment ESG, as these buyers of ESG services will often be people in product- or research-focused roles.
When speaking with anyone at a firm that is not a services or financial services provider, it’s likely they think of ESG as the people, processes, and systems for managing all of this nonfinancial data about their business. This will require the same rigor as the management of financial data — and include both the upstream and downstream relationships, decisions, and effects that flow out of that data.
The person most frequently saying “ESG” in a corporation will be someone with a risk remit, a sustainability remit, or a reporting remit (either as investor relations, public relations, finance, or a legal and compliance context). This is the person or team with an overarching responsibility for gathering, managing, and reporting on this data for regulators, investors, and to the directors or the board.
Corporate ESG is a more recent phenomenon than both investor and services ESG, as the latter two have more rapidly seized on the initialism as a marketing vehicle. For corporations, the moniker is only as valuable as its utility; given the increasing importance that this ESG data is playing in the business, however (in terms of the strategic direction of the business, its capital-raising, its reputation, and even its product and services offerings), the utility of a dedicated ESG function is increasingly making itself apparent.
The next post in this series on ESG will analyze ESG within the business and how it impacts organizational structure, business strategy, data management and processes, and partnerships, depending on the company’s relative maturity.