Investors Spend an Average of $1 Million on ESG Research to Inform Decisions

Published on:
by KnowESG

Institutional investors are increasingly concerned about sustainability, so companies that issue shares can no longer afford to ignore climate-related measures. According to new research, investors spend millions of dollars annually to independently analyse the climate data of companies before investing in them.

Environmental, social, and governance (ESG) concerns have grown in importance. Investors are apprehensive about financing companies with poor ESG credentials as customers become warier of companies that fail to satisfy their expectations. As a result of the inclusion of ESG elements, socially responsible investing has risen dramatically in recent years and has become a megatrend.

However, many businesses continue to underestimate the importance of this to investors. While it's hard to find an executive who doesn't acknowledge the importance of these variables, progress in the area of ESG is slow. This may be about to change, as a recent study by The SustainAbility Institute and ERM demonstrates the extent to which investors are already adopting ESG criteria to help them make decisions.

In its research for Ceres and Persefoni, ERM, the world's largest pure-play sustainability consultancy, discovered a huge disparity between corporate issuers (legal entities that produce, register, and sell securities to fund their activities) and institutional investors.

Institutional investors spend an average of $1,372,000 per year gathering and analysing climate data to guide their investment decisions, whereas public companies selling their shares spend $533,000 per year on climate-related disclosure.

ERM polled 35 institutional investors for more information as part of the study. It highlighted the regions where the greatest amounts of money are spent and the kinds of judgments made with the information gathered.

External ESG ratings, data providers, and consultants were at the top of the list, with 94 per cent of the investors surveyed using them. It was also the area where companies spent the most money, with an average of $487,000 spent on external expertise on the ESG implications of potential transactions. Collecting climate data related to assets came in second at 82 per cent, followed by internal climate-related investment analysis at 80 per cent.

There are two most prevalent responses to what investors should do with such resources. Around 85% of investors utilised climate data and guidance to make management decisions, and the same percentage used it to make proxy voting decisions for shareholder proposals—indicating that activist investing will likely continue to grow on the corporate agenda in the coming years.

However, investors didn't just utilise climate data on companies they already owned. Around 80% of people used it to think about portfolio creation, while the other half used it to make buy-sell-hold choices for specific stocks. Poor ESG measures, in other words, may encourage investors to reconsider adding a company to their portfolios.

Traditional lenders are finding it hard to provide financing to businesses in the aftermath of the pandemic. According to recent research, 21% of businesses experience difficulty obtaining adequate capital to support their expansion. Improved ESG performance in this situation could save them by grabbing the attention of possible backers in the form of institutional investors.


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