The rise of ESG: investors wake up to climate risk
A growing movement pushed companies and funds to weigh environmental and social factors alongside profit.
A profound shift has been under way in the world of finance, as investors increasingly weigh environmental, social and governance factors — known as ESG — alongside traditional measures of profit and risk, driven in part by a growing recognition of the financial threat posed by climate change.
The ESG movement reflects a dawning realisation among investors that environmental and social issues are not merely ethical concerns but material financial risks. A company exposed to climate change — through its emissions, its vulnerability to extreme weather, or the risk of its fossil fuel assets becoming "stranded" — may be a riskier investment than its balance sheet alone suggests.
Trillions of dollars have flowed into funds that incorporate ESG criteria, and major investors have begun pressing the companies they own to disclose their climate risks and reduce their emissions. Shareholder resolutions on climate have proliferated, and some large asset managers have signalled they will vote against directors who fail to act.
The trend has not been without controversy. Critics on one side argue that ESG amounts to greenwashing, with vague standards that allow funds to claim virtue without substance. Critics on the other side object to investors weighing anything beyond financial returns.
Debates over definitions, standards and effectiveness continue. But the rise of ESG has pushed climate and sustainability from the margins into the mainstream of finance, giving the owners of capital a growing voice in how companies respond to environmental challenges, and signalling that the markets are beginning to price in the risks of a warming world.