“Some companies that have their revenue strongly aligned with positive societal impact metrics may face a lot of outward-in ESG risk,” said Adam Fleck, director of equity ESG research at Morningstar.
The spread of double materiality within the ESG universe, meanwhile, may pose a challenge to a cornerstone of the industry, namely ESG ratings providers. Many of these still only measure the financial risks that ESG factors pose to the issuers they rank, and not their impact on the environment.
Some ESG score providers within the ratings industry have started responding to investor demand for a broader assessment of ESG. For example, Sustainable Fitch just launched a leveraged finance ESG scoring system that offers an independent view of an issuer’s overall ESG impact.
Expanding the definition of ESG in the current political climate isn’t without risks. Wall Street has this year come under direct attack from the GOP, with prominent members of the party accusing firms such as BlackRock Inc. of peddling “woke” investment strategies.
For JPMorgan’s Hecker, ESG is no more political than other forms of financial analysis. A focus on double materiality, meanwhile, can help prove its real-world impact to doubters.
“Every type of investment strategy has political considerations,” he said. “The history of accounting is rooted in politics.”
--With assistance from Frances Schwartzkopff.
This article was provided by Bloomberg News.