Quantifying Sustainable Investment

An estimated €70 billion investment volume is needed in Europe alone to achieve the sustainability goals of the international community. The European Action Plan for Financing Sustainable Growth, or Sustainable Finance Action Plan, focuses on the Environment, Social, and Governance (ESG) fields of activity in order to achieve sustainability goals together with the financial sector. This is also accompanied by binding legal requirements for companies. The EU taxonomy, for example, represents a uniform classification system for sustainable economic activities and investments for six defined environmental objectives. The Disclosure Regulation requires companies in the financial sector to be transparent in dealing with environmental risks and to disclose their sustainability strategy at the company and product level. All index providers must disclose information on the consideration of ESG factors for the respective index.

Quantifying Sustainable Investment

For institutional investors, these developments create a situation in which the risk-return profile of investments has to be evaluated according to new criteria. Specifically, they are facing the following challenges: 

1. Disagreement still exists on the exact definition of ESG domains and the relative importance of the dimensions;
2. Especially with regard to the measurement of ESG criteria, there is currently a confusing variety of data sources and data sets and a lack of integration and standardization - first studies show significant discrepancies, e.g., in the area of ESG ratings;
3. Investors often lack the methodological skills to work with the complex data sets (large samples, large number of indicators, longitudinal data, etc.) and draw valid insights from them.