Sustainabiliy in finance - ESG

In the last twenty years, the financial world paid attention to environment, sustainability and human rights issues: expanding the sphere of elements used for assessments beyond the traditional financial elements.


The financial world, with particular vivacity in the last 20 years, paid attention to environment, sustainability and human rights, expanding the sphere of elements used for evaluations beyond the traditional financial ones. The development of sustainability in finance has had as its crucial point the initiative launched in 2004, by the then secretary of United Nations, Kofi Annan, and addressed to more than 50 CEOs of the major financial institutions worldwide, to develop guidelines and recommendations with the aim of integrating these non-financial factors in analysis and decision-making processes regarding investments.
The result of the initiative was the report 'Who Cares Wins', with the guidelines that was the purpose of the initiative and where we find for the first time the ESG (Environmental, Social e Governance) term.
This report with 'Freshfield Report' published in 2006, where ESG evidences has been demonstrated as relevant in financial evaluation, define Principles for Responsible Investment (PRI) .


In the last years we have several labels to identify the different responsable and sustainable investments:

  • CSR ( Corporate Social Responsibility ): is referred to the actions of the company and the focus is on the environment and protecting the human rights of employees and collaborators who are in contact with the organization, as defined in the ‘forum per la Finanza Sostenibile’: “The Corporate Social Responsibility expresses the commitment of an organization to consider the environmental and social impacts deriving from its activity, in the conduct of its business’
  • ESG (Environmental, Social, Governance): is referred to the way in which investors combine the classic financial analysis with the work of the organization in the environmental field (CO2 emissions, waste disposal, …) social field (relationship withcollaborators, employees, …) and in the governance (trasparency, leadership, …).
  • SRI ( Sustainable and Responsible Investment ): as indicated in ‘forum per la Finanza Sostenibile’: “Responsible Sustainable Investment is a medium-long term investment strategy which, in the evaluation of companies and institutions, integrates the financial analysis with the environmental, social and good governance analysis, in order to create value for the investor and for the company as a whole ”. The focus is on sustainability and secondly the financial return unlike ESG.
  • Impact Investing : is referred to the Investments of companies, organizations and funds with the intention to generate a social or environmental favorable and measurable impact (i.e. in companies operating in the renewable energy sector), alongside or in place of a financial return, but it is different from philanthropy, where financial return is not really considered (i.e. donations, grants, …).

  • In normative field, in order to direct capital towards a low-carbon economy (environmental theme), the European Commission in May 2018 (Brussels, 24.5.2018 SEC(2018) 257 final) introduced three proposed regulations concerning:

  • taxonomy of eco-compatible activities;
  • benchmark low-carbon and positive carbon impact;
  • disclosure of ESG risks by institutional investors.

  • In Italy the law (Decreto Legislativo 30 dicembre 2016, n. 254) that gives responsability to Consob for monitoring the dissemination of non-financial information, as social reports and ESG information came into force into 2017; the related regulation was published in January 2018 and provides for large listed companies to publish a 'statement on non-financial issues' (DNF), such as environmental, social, personnel-related, respect for human rights, fight against active and passive corruption.
    Moreover, on 7 March 2019, the Romanian Presidency of the Council and the European Parliament reached a preliminary agreement on the introduction of transparency obligations regarding the ways in which financial companies integrate environmental, social and governance factors into investment decisions. The traditional fundamental financial analysis variables are increasingly accompanied by sustainability parameters. The drivers of this trend can be identified in the following points:

  • products that increasingly meet the needs of the market;
  • greater transparency and therefore greater knowledge of these tools;
  • trade policies and more effective communication;
  • greater proactivity on the part of banks, insurance companies and financial consultants.

  • Organizations are evaluated by numerous providers also on the basis of reports provided by environmental associations, trade unions and consumer associations, containing information on:

  • environmental impacts;
  • protection of employees' rights;
  • differences in wages within the company (eg wage differences between the different levels);
  • data and information that is provided directly by the organization being evaluated.

    Below is an overview of some ESG rating providers, compared in the work published at the end of July 2017 ‘esg-reports-and-ratings-what-they-are-why-they-matter’ in ‘Harvard Law School Forum on Corporate Governance and Financial Regulation’:

  • Bloomberg in addition to giving its own (annual) evaluation via ‘Bloomberg ESG Data Service’, it also makes the evaluations of other providers available. In its assessment, Bloomberg penalizes companies that make little information available;
  • Corporate Knights with ‘Corporate Knights Global 100’, whose (annual) evaluation is present both on Bloomberg and on Thomson Reuters, before entering a company in the list provides for a formal data verification process. It is very influential worldwide;
  • Institutional Shareholder Services Inc. (ISS) considers more than 200 factors, is considered one of the leading providers worldwide and is continuously updated; MSCI : MSCI ESG Research continuously monitors companies and assessments are divided into the three ESG factors and 10 themes including: natural resources, climate change, governance and company behavior. The data is updated on a weekly basis;
  • Substainalytics : The Sustainalytics ESG ratings are available on: Bloomberg, Factset, and IHS Markit. The review is carried out in depth annually and is widely used because many indicators are taken into the analyzes;
  • Reprisk : The evaluations are updated every day and the evaluations are divided into sectors;
  • Dow Jones : launched the first index that measures sustainability and is based on the ESG analysis by RobecoSAM’s. The Dow Jones Sustainability indexes are published on the RobecoSAM’s website and are public.
  • Thomson Reuters : makes the Thomson Reuters ESG Score available on its Eikon platform, which is however little used compared to the others.

  • The focus on ESG rating services and analysis methods is still active, as confirmed by the fact that in April 2019 Mody's also announced that it had bought a majority stake in Vigeo Eiris, which deals with environmental and social assessments and governance.
    The need to acquire and expand skills, motivated by the continuous increase of interest in responsible investments, is the main reason that justifies the continuous and growing interest in ESG rating services.


    In the study ‘2018 GLOBAL SUSTAINABLE INVESTMENT REVIEW ’ of GSI-Alliance sustainable investment strategies are listed:

  • NEGATIVE/EXCLUSIONARY SCREENING : the exclusion from a fund or portfolio of some sectors, companies or practices based on ESG criteria (exclusions of companies operating in the tobacco, arms, alcohol, .. sector);
  • POSITIVE/BEST-IN-CLASS SCREENING : investments in selected sectors, companies or projects for positive ESG performance in relation to the market sector;
  • NORMS-BASED SCREENING : investment screening with respect to minimum standards of business practices based on international standards issued by UNICEF,OECD, ILO e UN;
  • ESG INTEGRATION : the systematic and explicit inclusion in investments of environmental, social and governance factors in the financial analysis;
  • SUSTAINABILITY THEMED INVESTING: investments in themes or activities specifically related to sustainability (e.i. clean energy, "green" technology or sustainable agriculture);
  • IMPACT/COMMUNITY INVESTING : targeted investments aimed at solving social or environmental problems, and which include investments aimed at the community, where capital is specifically addressed to needy individuals or communities, as well as financing for businesses with clear social or environmental goals;
  • CORPORATE ENGAGEMENT AND SHAREHOLDER ACTION : uses the power of shareholders to influence the behavior of the company, also through the direct engagement of the company (e.i., direct communications with the senior management and/or board of directors of the companies), presenting the proposals of the shareholders and the votes with ESG guidelines.

  • Furthermore the Financial Times in the article, published in May 2019, "ESG rating agencies fulfill the need for a know-how" interviewed the sustainable investment managers of some large companies to understand how they are used and how reliable these ratings are. The study found that investors, in their analyzes, take into consideration the ratings of different providers by comparing them with each other. In some cases, the various factors are also evaluated, therefore not only the ESG rating, a unique indicator for the three components, is taken into consideration, but also the assessment by single factor is taken into consideration:

  • Environmental
  • Social
  • Governance

  • A negative aspect of sustainable investments is that this could lead to leaving the so-called "brown" industries, those polluting, which instead need to raise capital to undertake a transition and drastically reduce their environmental impact.
    To prevent this from happening and to encourage sustainability projects, the 'transition' investments (transition bonds) were born and used by these polluting companies in the initial phase of the transition.
    Attention to the transparency of companies and to environmental, social and governance impacts is at 360 degrees and these new values that go alongside the traditional in the choice of investments can really make the difference. But are ESG ratings really able to influence the performance of instruments on the market?

    This is one of the questions behind the Politecnico di Milano study ‘La relazione fra rating ESG e lo spread di rendimento dei titoli obbligazionari sui mercati europei’, which compared a set of instruments on the market with a low ESG rating to a set with a high ESG rating and what emerged was that, while these ratings had almost no impact until 2016, in recent years yields were effectively influenced by the ESG rating.
    The results are consistent with the hypothesis that the market, over time, has attributed a negative 'spread' to broadcasters with the best ESG score, judging them to be less risky in the short to medium term. Furthermore, the impact of the rating of the single ESG factor on the market was studied and it emerged that the decisive parameter is by far the one linked to good governance; on the contrary, the Environmental and Social factors seem rather to push in the opposite direction. In fact, it seems that good governance leads investors to consider it as a sign of lower agency costs, risks of opportunistic behavior and better monitoring and therefore to give an idea of greater stability.