Toward ESG clarity Toward ESG clarity http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\water-cupped-hand-small.jpg March 11 2022 January 10 2022

Toward ESG clarity

Three things to watch in 2022.

Published January 10 2022
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If 2021 was the year ESG hit the mainstream, 2022 should be the year it becomes depoliticized, investors better understand its nuances and sources of its data improve.

  • It’s not an investment approach—it’s data Many investors interested in environmental, social and governance (ESG) think it stands for a strategy. 2022 may be the year more of them realize it’s part of the process, providing incremental information that could lead to a better evaluation of risks and opportunities when making portfolio decisions. If investment managers are successful in communicating this, more people also will become familiar with the distinctions and mechanics of how ESG data is used to achieve different outcomes, from supporting risk adjusted returns to thematic and impact investing.
  • Closing the loop on disclosures Expect corporate reporting to get its act together in 2022 and deliver more robust, comparable and useful ESG information. The newly formed International Sustainability Standards Board (ISSB) is set to deliver a baseline of global disclosures to meet investor needs, creating one ESG standard to pair with current financial accounting practices. Consistent universal data should make assessing industries and companies more reliable. And with clear standards, companies likely will report more material information—a boon for investors!
  • DOL revisits retirement plans The tone of the Department of Labor’s Financial Factors rule, passed under the Trump administration, had a chilling effect on the role of ESG in retirement investments. A year ago, many ERISA fiduciaries perceived that ESG factors were banned from consideration in employer-sponsored plans, notwithstanding the language of the rule. President Biden issued an executive order directing the DOL to stop enforcing it and revisit the subject. It proposed a new rule in 2021 that has a decidedly more ESG-friendly tone, explicitly promoting the appropriateness of considering material nonfinancial factors within a fiduciary’s investment analysis. Look for the final rulemaking this year.
Tags 2022 Outlook . Responsible Investing .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Terminology such as “ESG integrated,” “sustainable” or “impact,” among other terms, is not uniformly defined across the industry. Investment managers may understand and apply ESG factors in different ways, and that the role those factors play in investment decisions also varies. Therefore, we recommend investors understand the role of ESG factors in a strategy to ensure that approach is consistent with their investment objectives. Like any aspect of investment analysis, there is no guarantee that an investment strategy that considers ESG factors will result in performance better than or equal to products that do not consider such factors. Investing and making buy-and-sell decisions that emphasize ESG factors carries the risk that, under certain market conditions, the fund or strategy may underperform those that do not incorporate such factors explicitly into the decision-making process. The application of ESG criteria may affect exposure to certain sectors or securities and may impact relative investment performance depending on whether such sectors or securities are generally in or out of favor in the market.

 

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