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Sustainability and ESG in 2023

Looking ahead through the eyes of investors.

Boards of directors and company leaders are much increasingly aware of the sustainability components of external reporting. Environmental, social, and governance (ESG) issues occur both inside and outside of investors' portfolio decisions, which is a complex but increasingly important fact. As a result, it can be difficult for businesses and their boards to determine whether investors are pressing them to produce operational sustainability results that will influence portfolio decisions, whether in publicly traded funds, private equity, or credit vehicles. This distinction is significant because of a developing problem that is currently unnoticed but will soon require the attention of every executive team and board director: the increasingly sophisticated methods by which investors evaluate and use sustainability-related information in portfolio decisions, as well as the attention being paid to company boards' decisions about these same topics.

Capital markets in the middle

The temptation to shut out the present ESG and sustainable investing debate until it is more amicably resolved is great because it is contentious and often loud. Leaders must ultimately repress this inclination and acknowledge that this is a topic worth talking about because sustainability factors in investment seem to be here to stay, and not only in narrowly focused ESG funds.

The seeming quick adoption of sustainability and ESG across investing asset classes is one of the most talked-about features of these transformations. We may avoid going over the oft-cited data on the growth of dedicated ESG funds and forego discussion over whether funds should be recognised as ESG because ESG topics now frequently appear as a baseline even in many investor portfolios that are not ESG focused. Instead, let's look at the role that financial markets play in sustainability and the lessons that may be learned from this evolution.

Capital markets and the instruments used in them were not viewed as essential to sustainability even five years ago. An established system connecting asset managers of commingled funds, and consequently asset owner preferences, to business oversight and managerial decisions was created through long-standing engagement between major shareholders of publicly traded companies and boards of directors.

Regional policy changes that generate both incentives and punishments for specific sustainability concerns coincided with the expansion of the corporate governance and engagement agenda to more actively address environmental and social topics. We now live in a rather cloudy environment as a result.

Publicly traded corporations may be unsure as to whether stakeholder and investor issues are relevant for making investment and portfolio decisions or if they are instead part of corporate governance standards, which may or may not be connected with particular portfolio decisions. When the aforementioned factors might be true at the same time is also unknown.

At the same time, privately held businesses, infrastructure development, and real estate endeavours are now a part of the same fundamental conversation. This indicates that market mechanisms—and, in many cases, the underlying assumptions behind them—are being rapidly reviewed, enlarged, and altered. In other words, CEOs and board members need to be ready since 2023 is likely to be a pivotal year.

Investment decisions made by investors may be influenced by include sustainability in asset allocation.
Investors are taking in the wealth of new information that is available and utilising it to examine how they should integrate sustainability-related concerns into portfolio decisions even as arguments over the usefulness of ESG flare. We observe two different outcomes of this. Asset owners inquire with general partners (GPs) and portfolio managers (also known as public and private market investors) about the knowledge they have on how to distinguish laggards from better performing or more resilient companies in general as well as in terms of sustainability topics.

(Source : Bain & Company)
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