Environmental, social and governance (ESG) data is entering its adolescence. The early days of ESG were characterised by a modicum of faith amongst investors that ESG performance data correlated with financial returns. We knew from empirical studies and meta-analytic summaries of the literature that considering ESG data in investment decisions was more likely than not to correlate with higher returns compared to benchmark1. Investors piled in and the assets under management that considered ESG information grew2, creating in some circumstances a self-fulfilling feedback loop of higher returns.
However, adolescence is characterised by a search for personal meaning and ever-growing responsibility and these challenges are indicative of where ESG data will need to evolve if sustainable finance is to reach its full potential. The challenge with our current approach to ESG data is that we are attempting to surmise financial risk based on proxy information. Our current set of data is indicative of financial risks and opportunities, but cannot be
