Can Sustainable Investment Be the Answer to Our Serious Issues?

 

As an ESG Reporting consultant, Investing in ESG or sustainable practices have a principal-agent issue. Business leaders will have a much more significant influence if they consider sustainability while making decisions. The capital market's considerable demand for ESG-related funds is fueled by the two benefits frequently touted for ESG investing: These funds are anticipated to offer higher financial returns than the beneficial ESG impact their names imply. Performing well while doing well is a compelling value proposition that exudes positivity to investors.



Being an ESG Consulting in Dubai, ESG investment has a principal-agent issue. This is so because investors, both institutional and retail, hand over their investment decisions to portfolio managers, who are tasked with selecting equities that will beat the market and evaluating the ESG credentials of companies. But anyone knowledgeable with current portfolio theory would be aware of how challenging it is to choose equities that consistently outperform the market. The obligation to (credibly) evaluate ESG credentials further increases the complexity of fulfilling the twin objectives.

We are an ESG Consultant, Investment professionals have the chance to package and sell an alluring product, ESG funds, which is more profitable than conventional funds due to the higher fee structure. If investors are drawn to the ESG label but need more natural ability or time to understand the myriad of ratings, reports, and principles (which is frequently the case). Furthermore, because there are no precise legal standards for determining which funds qualify as "ESG funds" or "sustainable funds," these funds frequently self-identify as such.

This indicates that a variety of intermediaries (agents) serve as gatekeepers in the context of ESG investment and have a substantial impact on the flow of funds: Companies in the portfolios of fund managers who claim to be ESG-focused are carefully selected, and funds and firms are rated and categorized as ESG-aligned by rating organizations and consultants (or not). Wall Street and its ilk can impose ESG rules and norms, even though there is no standard measure of ESG in today's financial markets.

In our role as ESG Consulting in Dubai, Investors with limited time and attention rely on ESG labelling and reports. Portfolio companies held by ESG funds typically obtain higher ESG scores, not because of superior compliance records but because of more ESG disclosure overall. Another study on institutional investors examined whether members of the PRI, a project endorsed by the UN to create a more sustainable global financial system, have higher ESG ratings at the portfolio level. The authors discovered that US signatories don't perform any better than non-signatories, which suggests that virtue-signaling is more common than actual concern for doing the right thing.

As an expert ESG Reporting consultant, Businesses operating in the real economy affect ESG and our world's sustainability, not financial market investments. Companies cannot afford to take an agent approach to ESG and sustainability challenges if they want to build long-term value for their industry and society. They must adopt an owner's or principal's perspective instead. In other words, they must execute leadership grounded in sensible financial and economic concepts while including ESG factors.

Location: Dubai - United Arab Emirates

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