State Street Releases the New Report on "The Future of ESG"
In the report “The Future of ESG”, State Streets explores the growth of ESG across the financial system and how it is evolving. They identify long-term drivers of ESG as well as trends that matter in the short term and take stock of the solution space for incorporating ESG considerations into financial decision-making.
“The Future of ESG” report is an effort to cut through the complexity and focus on what matters.
Key findings include:
ESG is about supply and demand
While having originated in part from social considerations, ESG is a grassroots movement expressing current demands that matter to investors, consumers and employees. At its most fundamental, ESG connects those parts of the world on which we have not placed an explicit value — clean air, fresh water, healthy and supportive social fabric — with the financial economy. By explicitly acknowledging these factors, ESG enables us to include in economic decisions specific things we value but formerly failed to measure. Therefore, ESG is a re-evaluation and a broadening of what matters for investors, companies, and policymakers. It is a bigger and more accurate picture of value creation.
ESG is everywhere now
ESG started with investors in publicly listed companies but has since spread across the entire financial system. It now extends to public and private companies, financial institutions such as banks and insurers, service providers such as rating agencies, index providers and consulting firms, and policymakers. Each plays an important role in the ESG value chain, but their motivations and approaches vary considerably.
Technology and know-how drive ESG responses
Impelled by a range of social and cultural values comprising consumer and investor demand, other ESG drivers have increased in importance, including data and analytics, geopolitics, technological change, economic development, and financial incentives. As ESG supply expands to meet demand, we expect developments in each of these areas to shape the long-term trajectory of ESG in the marketplace. For example, ongoing improvements in data and analytics will make it easier to measure and account for those areas that previously have not been easily measured, creating a virtuous circle that further drives growth in ESG.
The scope of ESG will continue to evolve
Today, it is fair to say that climate change is the most prominent focus of ESG. Greenhouse gas (GHG) emissions constitute an enormous and largely unpriced negative externality. But the overall scope of ESG is broader and promises to change over time. We identify four trends that will drive developments in ESG in the next 12 to 18 months. These include a path toward international standards around ESG; the growing importance of transition finance in achieving net-zero; greater recognition of nature-related risks; and more focus on the importance of human capital in creating value.
As ESG is increasingly recognized as a necessary response to market demand, solutions will proliferate and improve
We provide a current snapshot of the commercial ESG solution space. While technical innovation, government regulation, standards, policy frameworks, academic research, and investor coalitions are enablers of ESG and should work hand in hand with market solutions, we create a market map that categorizes ESG solutions into five groups: investment products and services; data, analytics and research; scores, ratings, and indices; regulatory reporting and compliance and integrated tech platforms; and advisory and consulting services.
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