Large companies and investment firms are beginning to understand the importance of mitigating system-level risks, particularly risks that involve climate and the environment. Secondarily, investors are beginning to question the environmental, sustainability, and governance impacts of their investments. The emerging divestment trend from heavily polluting industries is a good example of the business and investment shift that is ongoing. For a long time, investors and portfolio managers equated sustainability with a cut in profits, but new research indicates that the result is the opposite. As investment firms, investors, and portfolio managers begin to assess risks on the systemic level, risk data companies are poised to benefit. Here’s how and why.
Material risks are numerous
ESG emphasis requires investors and their portfolio managers to consider the long-term implications of investments. Sell-side strategies are no longer an option for a new generation of investors who are concerned with sustainability and long-term growth. For these investors, analysts must take an integrative approach.
The CEO of State Street Global Enterprises told The Harvard Business Review that, “We seek to analyze material issues such as climate risk, board quality, or cybersecurity in terms of how they impact financial value in a positive or a negative way. That’s the integrative approach we are increasingly taking for all of our investments.”
Fiduciary responsibilities are leaning toward systemic risk analysis
European investors, as well as Canadians and British, are not focusing primarily on returns. Instead, the fiduciary duties of portfolio managers are being considered through the lens of ESG. If advisors and analysts fail to take sustainability into account, then they are failing in their fiduciary responsibilities.
Evolving regulations require risk data companies that can leverage resources and tools in new and challenging ways. The companies that are ahead of the curve will be prepared to weather the future of risk analysis and project the future average probable cost of not managing these risks.
Fill data collection gaps
Companies have long relied on financial data and analysis that measures growth and returns. As ESG gains prominence, importance, and even regulations, it is imperative that organizations begin to build software and processes for measuring sustainability and impact. One suggestion is to learn from risk analysis firms such as RMS https://www.rms.com, which from a simple risk modeling firm has turned into a massive risk data provider now merged with the Moody’s Rating Agency.
ESG impacts are in the process of being quantified. Risk data companies that specialize in gathering and processing these metrics stand to gain prominence and remain competitive.