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Environmental, Social and Governance (ESG)
Responsible investment requires integration of ESG factors in investment decisions - from screening of investment opportunities from a non-financial point of view and managing sustainability risks to ESG compliance, transparency and disclosure of the integration of ESG factors.
Three main drivers are currently aligned to boost ESG integration:
- Investors demand: new generations of investors are more and more environmentally conscious and believe that financial return is not completely detached from environmental or social impact. They are interested in knowing more about sustainable and ESG products as the current market offering is not sufficient enough to satisfy their need;
- Asset managers are now realising that ESG is an opportunity to truly engage with their investors, telling them the story of their ESG engagements and that integrating ESG factors doesn't happen at the expense of financial performance, on the contrary;
- European authorities consider sustainable finance, and thus ESG, as one of their top priorities. Their objectives are to finance the transition to a more sustainable economy, better capture systemic stability risks stemming from climate change, for example, and foster long-termism when it comes to investment decisions. Whether asset managers have ESG at the core of their business or not, they will soon require to:
- report on their engagement policies and votes
- systematically ask about the ESG preferences of their prospective investors
- disclose sustainability risks and how they are managed and integrate consideration of sustainability risks within the organisation, resources and processes.
This indicates for financial services firms that they will be required to integrate ESG factors in their investment processes in the near future and also report to their stakeholders on their engagements.
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