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  • Writer's pictureNardos Berehe (Ethiopia)

The ESG Rationale in Business Investments and Reporting



Environmental, Social, and Governance (ESG) are a set of standards that measure a business's impact on society, the environment, and how transparent and accountable it is. Although the term ESG is often used in the context of investing, stakeholders include not just the investment community but also customers, suppliers, and employees, all of whom are increasingly interested in how sustainable an organization’s operations are.

According to OECD, ESG investing has grown rapidly over the past decade, and the amount of professionally managed portfolios that have integrated key elements of ESG assessments exceeds USD 17.5 trillion globally, by some measures. The growth of ESG-related traded investment products available to institutional and retail investors exceeds USD 1 trillion and continues to grow quickly across major financial markets. In March 2022, a survey that included 1,250 managers and senior leaders at larger companies showed that ESG remains a growing priority for businesses in both the US and Europe. Although “Environmental” issues are seen as the most important, organizations are starting to balance attention across all three ESG factors.

A Fortune report shows that although first coined in 2004, ESG has sparked a feeding frenzy in the financial sector over the past few years. The fever reached its peak during last year’s UN Climate Change Conference when green finance was feted as a key tool in the fight against climate change. Since then, it has lost some of its shine. Morningstar revealed that in 2021, assets in sustainable funds hit $2.97 trillion, but showed a decline to $2.24 trillion in September of the same year. Nevertheless, growth in ESG investment products outran all other segments of the asset management industry.

The reporting of ESG remains to ensure the purpose of a business is making the cost of capital higher for companies that put profit before social gain, it has continued to face backlash. Mckinsey stated that one of the challenges for major investors is a lack of strong metrics for ESG. They quote how most large companies report extensively and ambitiously around ESG in order to inform their stakeholders, who have a difficult time making sense of all that reported data. Marketing departments might overstate a company's commitment to the environment without actually making meaningful changes because there are no established standards for ESG investing.


In fact, a recent survey highlighted that almost all companies, around 90 percent, report on sustainability, however only 15 percent of investors can successfully integrate this information into their investment decisions.

Rightfully so, the framework was quickly followed by attacks and criticism of greenwashing. Forbes described the journey of this concept in recent years rather as a topsy-Turvy for investments but stated that it may be a bump in the road now, unlikely to derail the overall path. Institutions like the European Commission have already brought in measures to combat greenwashing, most notably the Sustainable Fund Disclosure Regulation which comes into effect fully this year.