By: Lucy Kessler, YCELP RA
Sustainability has moved from the margins to the mainstream of the investment world evidenced by the fact that assets under management in the United States invested in responsible investment strategies have grown 76 percent since 2014. Any investor will tell you that demand for responsible investing is increasing. What many cannot explain, however, is how to quantify sustainability and how it corresponds with financial performance. These issues were the focus of a Yale Initiative on Sustainable Finance Symposium (co-sponsored by the Journal of Environmental Investing) on September 22 at the Yale School of Management.
The Symposium brought together academics and practitioners to advance the conversation on Environmental, Social, and Governance metrics. Dan Esty, the Director of the Yale Center for Environmental Law & Policy (YCELP) and Hillhouse Professor at Yale, opened the symposium with a call to action focused on directing capital toward more sustainable enterprises. Cary Krosinsky, the editor of the Journal of Environmental Investing, followed Professor Esty and challenged the audience to deliver on the promise of sustainable investing.
They set the stage by introducing key topics and important distinctions, such as the difference between data and “decision-useful data,” the need for a universal methodology to incorporate ESG metrics into decision-making frameworks, and the desire for standardization of sustainability metrics.
“There is growing interest among mainstream investors who want to introduce a sustainable lens to their investments but are limited by poor data. The Yale Initiative on Sustainable Finance was designed to create a new field of academic research to bring analytic underpinnings to the world of sustainable finance,” explained Professor Esty. “There is huge interest in sustainable finance but there has been more talk than careful analysis. The symposium provided an opportunity to ground the conversation on a firmer academic foundation,” he commented.
Breakout sessions, featuring practitioners from various disciplines, enabled a deeper exploration of the challenges and potential solutions regarding ESG metrics. Topics ranged from exploring how technology could spur innovation in ESG research, to green bond risk commodification, and corporate financial disclosure practices. The conference continued in the afternoon, with presentations on corporate responsibility on climate change, the impact of corporate controversies on performance, and ESG equity portfolios and financial returns.
Todd Cort, the Faculty Co-Director at the Center for Business and the Environment (CBEY) and guest editor of the Journal of Environmental Investing discussed the need for better metrics: “Though there is a trend in ESG factors suggesting higher financial performance, there is insufficient data to prove a statistically rigorous correlation of positive effect.” However, he pushed back on the need for standardization of data, explaining, “ESG data should not be standardized, because there is no one answer. There are different views of what sustainability means, so you need a framework that is flexible and can allow for choices.”
Key takeaways from the symposium included that investor interest can push companies to produce better metrics, the need to narrow the scope of materiality and measure fewer topics more deeply, that green bonds serve a vital role in transferring capital to clean infrastructure, and that companies should have an external reporting strategy that is accessible to mainstream investors.
In addition, the Symposium served as the launch of a special issue of the Journal of Environmental Investing on the state of ESG Data and Metrics. The journal chapter topics were reflected in the Symposium presentations and include The Ecosystem of ESG Data, The Application of Machine Learning for Sustainable Finance, and ESG Integration and Value Creation, among others.
Cary Krosinsky, the Journal’s editor, remarked, “In many ways it’s fair to say we’ve had the ESG conversation exactly backwards. We created ESG data then tried to figure out what to do with it. Instead we should identify the outcomes we want and select strategies that can succeed on both sustainable and financial grounds, and then scale them.” Krosinksy continues, “In this issue of the Journal of Environmental Investing paired with the Symposium at Yale we hope to have started down this critically important path together.”
The Yale Initiative on Sustainable Finance (YISF) is a joint program of the Yale Center for Environmental Law & Policy (YCELP) and the Center for Business and the Environment (CBEY). YISF is dedicated to furthering research on collaborative approaches to innovation in sustainable finance, and is made possible by funding from the World Business Council on Sustainable Development (WBCSD), the Moore Foundation, Roberta G. Gordon, and Mr. and Mrs. Mark T. DeAngelis.