More and more institutional investors and asset managers are integrating ESG performance into their financial decisions. A recent survey found that 80% of investors believe that ESG impacts the financial performance of investments, 61% see it as a means to reduce portfolio volatility, and 78% agree it helps minimize tail risks.
For modern investors, ESG performance is more than a standard metric: it’s a way to assess a company’s long-term value creation capability and resilience. This helps them make informed capital allocation decisions.
ESG analyses also help institutional investors meet stakeholders’ and regulatory bodies’ expectations around sustainability in investment decisions. This can boost client satisfaction and minimize regulatory issues.
Here, we take an in-depth look at the importance of ESG performance and explore common challenges and valuable ESG factors for investors.
What is ESG performance?
ESG performance is the measurement of a company’s environmental, social, and governance (ESG) factors. It reveals how an organization manages risks and opportunities, helping you gauge its operational resilience and financial health.
It shouldn’t be confused with sustainability intent. Unlike intent (for example, pledging to go low-carbon), ESG performance focuses on tangible and comparable results, like verified carbon emission reductions.
ESG performance also differs from ESG scoring. It’s a company’s measurable impact on ESG issues. Conversely, an ESG score is a metric that’s typically assigned by third-party agencies and quantifies a company’s impact for easier stakeholder assessment.
Why ESG performance matters to investors
ESG performance is quickly becoming a yardstick for measuring a company’s operational efficiency and financial health. It matters to you as an investor because it impacts:
- Risk mitigation: Strong ESG performance minimizes a company’s risk of facing regulatory fines, labor disputes, and financial irregularities. The lower the risk exposure, the safer an investment opportunity will be for stakeholders.
- Cost management: Measures like improved energy efficiency and waste management can reduce companies’ operating costs, improving profit margins.
- Capital access: Businesses with strong ESG performance are likely to secure financing at good rates, allowing them to maintain efficient operations and grow.
- High-quality talent attraction and retention: Strong social practices like employee diversity and human rights protection can attract skilled workers—the backbone of any organization.
- Reduced reputational liabilities: A solid ESG record can enhance consumer trust, which is vital for continued business.
Essentially, target companies with strong ESG practices make stable investments. They’re less vulnerable to risks (regulatory, financial, and reputational) and can deliver consistent, positive returns over time.
Common ESG challenges
While valuable in investment decisions, integrating ESG performance is no easy feat—especially when assessing ESG data manually. Some of the challenges you may face include:
- Inconsistent reporting metrics: With different companies employing varying ESG frameworks, it can be difficult to compare target organizations.
- Data gaps and errors: Some companies may provide inaccurate disclosures or overstate ESG intent (greenwashing), affecting the quality of investment decisions.
- Evolving regulations: The evolution of regulatory frameworks, such as the European Union’s Corporate Sustainability Reporting Directive (CSRD) and the International Sustainability Standards Board (ISSB), increases the complexity of assessments.
- Private data analysis challenges: Private markets are typically less standardized than public markets. Assessing their data can be time-consuming and result in investment delays.
AI-powered platforms like Manifest Climate can help address these challenges through automated data collection and analysis. Manifest Climate eliminates the need to manually comb through fragmented public reports by providing a centralized repository of investor-grade ESG data and insights. This makes it easier to determine how a target company’s ESG performance compares to peers, industry best practices, and frameworks, allowing for quick, informed decisions. Here’s a look at how our platform works:
- Framework alignment: We use artificial intelligence to evaluate disclosures against global reporting frameworks, like CSRD and ISSB and to identify data inconsistencies as well as company strengths and weaknesses.
- ESG benchmarking: Manifest compares companies’ ESG performance against peers, industry standards, and even custom or proprietary investor frameworks to help determine where organizations stand.
- Consistency: Our solution eliminates biases that could unfairly impact your decisions by using a consistent assessment methodology.
- Risk and opportunity assessment: We flag ESG gaps that could expose companies to risks and identify opportunities based on trends, helping you assess the suitability of different investments.
- Scalability: We use AI to scan ESG data sources, reducing manual work from hours or days to minutes. This makes it easy to scale assessments.
- Data verification: We link all ESG data and analyses to source documents for seamless investor verification.
Manifest Climate does the heavy lifting, so you can focus on developing your investment strategy and engaging with companies more effectively. Our platform can also facilitate well-informed decisions by highlighting target companies’ ESG strengths and weaknesses.
Key ESG performance indicators for investors to track
ESG performance is measured through qualitative disclosures and quantitative metrics from:
- Public sources: Annual reports, press releases, regulatory filings, and company websites
- Private sources: Direct company engagements and questionnaires
- Third-party sources: ESG ratings and data providers, such as Sustainalytics and MSCI
A good best practice is to use data from public databases as a baseline and then include private sources and proprietary analyses to fill gaps. This helps to improve benchmarking and validate disclosures. To make your work easier, our AI-powered platform can consolidate, analyze, and standardize all this data for you.
Here’s a look at some material ESG metrics retrieved from these sources:
Environmental metrics
Environmental metrics are quantifiable data points that measure a company’s impact on the natural environment. They include:
- Greenhouse gas (GHG) emissions
- Energy consumption
- Water use
- Renewable energy use
- Waste management
- Resource usage
- Recycling rates
These metrics show you how well a company handles regulatory risks, reputational liabilities, and operational costs, helping you make informed investment decisions. For example, you can see an organization’s emission rates and resource and waste management practices. As these can be indicators of an organization’s efficiency and cost control, they enable you to analyze its regulatory risks.
Social metrics
Social metrics evaluate a company’s relationships with key stakeholders, such as customers and employees. They focus on an organization’s relationships with people and can, therefore, help gauge their alignment with societal expectations. Key social data points include:
- Employees: Workforce diversity and inclusion, employee welfare, fair wages, and career development
- Customers: Responsible data practices, product safety, and efficient complaint handling
- Communities: Philanthropy, engagement programs, and responsiveness to local community needs.
- Supply chain: Human rights in supply chains, labor condition audits, and ethical sourcing
These indicators show whether a company can attract and retain top talent, maintain consumer loyalty, and secure the social license to operate within its chosen community. Strong social performance—such as effective community engagement and customer data protection—can foster long-term brand growth. So, it’s often a positive signal for investment.
Governance metrics
Governance metrics focus on a company’s leadership and overall management, highlighting data points such as:
- Board diversity and expertise
- Executive pay alignment with performance
- Shareholder protections, like fair voting rights
- Ethical practices, like whistleblower protections and anti-corruption policies
Strong governance reduces the risk of company mismanagement and fraud. It also enhances accountability and transparency to shareholders and signals strong oversight. These are positive signals and can help you allocate capital confidently.
How to use ESG performance to drive engagement and stewardship
ESG performance is more than an investment assessment tool; it can also facilitate effective engagement and stewardship within portfolio companies. With ESG performance-driven insights, you can help portfolio companies improve their processes and long-term performance.
To do so, start by identifying gaps in current performance:
- Are companies falling short in meeting their greenhouse gas emission targets?
- Is their workforce lacking in representation?
- Does executive compensation not align with shareholder value creation?
When you identify the gaps, engage portfolio companies on highlighted issues and discuss your expectations. You can do this by setting up direct dialogues with leadership. Reference ESG data during your conversation to strengthen credibility and enable benchmarking.
Also, encourage companies to use standardized reporting frameworks. This makes it easier to track organizational improvements and benchmark performance against peers.
If companies fail to address ESG concerns, escalate stewardship through measures like shareholder activism or proxy voting to safeguard your investments.
Turn ESG data into credible, comparable, and decision-useful insights
Assessing a company’s ESG performance can help you gauge its long-term profitability and risks, allowing for informed investment decisions. But with different companies following different reporting frameworks and some maintaining fragmented data sources, evaluating ESG performance can be time-consuming and labor-intensive. This makes AI-powered ESG reporting tools like Manifest Climate vital.
Manifest Climate can consolidate structured and unstructured data and align disclosures with leading sustainability reporting frameworks to support investor decision-making.
Our platform can also identify ESG risks and opportunities to facilitate informed capital allocation, as well as automate benchmarking to make it easier to distinguish leaders from laggards when comparing target companies. All our assessments are linked to source documents, promoting seamless verification and company engagements.
Want to integrate ESG performance into your investment decisions? Contact us today to learn how Manifest Climate can help you.
