The Role of ESG in Sustainable Finance

The role of ESG performance in sustainable finance and responsible investing

Sustainable finance is increasingly finding its way into the market and is driving developments for more responsible investing. Financial players are responding to these developments and to a growing market desire to incorporate additional non-financial measures into investment decisions. Specifically, there’s a growing demand to incorporate Environmental, Social and Governance (ESG) criteria into sustainable finance investment approaches.

What exactly do we mean by ESG?

ESG is the abbreviation for Environmental, Social and Governance. ESG performance is used as an important capital market measure. One that is used to identify superior risk-adjusted returns and indicates a more precise measurement of an organization’s ESG performance.

Let’s take a closer look at what falls into each pillar of ESG:

The three pillars of ESG (Environmental, Social, and Governance)

While there is overlap between corporate sustainability and ESG, there are some nuances. ESG is internationally established in companies as well as in the financial sphere to express whether and how environmental and social aspects are evaluated in corporate decisions and practice as well as in the analysis of companies by financial service providers.

As such, investors are increasingly using ESG criteria in their analyses to identify material risks and growth opportunities for companies.

ESG criteria can look like the following examples:


  • Share of renewable energy sources
  • Climate change and adaptation strategy
  • Emission footprint


  • Social standards in the supply chain  (e.g. worker safety and health protection)
  • Fair remuneration, training and development opportunities for employees and decent workplace conditions
  • Equal opportunities and diversity


  • Existence of a sustainability strategy
  • Approach to strategy integration and implementation of sustainability management (holistic vs. function-related)
  • Ethical behavior (e.g. combating corruption and bribery)

Related: Unpacking ESG: 6 Questions You Were Too Afraid to Ask

What developments and trends are driving this broad sustainability approach for the financial sector?

The market for sustainable finance investments (e.g. green bonds or carbon bonds) is growing into a multi-billion market, which is increasing the attractiveness of including ESG criteria in the investment cycle. According to Bloomberg News, “ESG assets are on track to reach $53 trillion, based on our analysis, up from $37.8 trillion by year-end. They jumped to $30.6 trillion in 2018 from $22.8 trillion in 2016. While Europe accounts for half of the global ESG assets, the U.S. has had strongest expansion this year and may dominate the category starting in 2022.”

In addition, studies show that ESG assets are just as profitable as conventional assets, since around 80% of a company’s value is now derived from non-financial capital such as know-how, sustainability, employee satisfaction, etc.

You might also like: The Certainty Factor: How Sustainability and ESG is Driving Corporate and Investment Decisions

Data challenges in the context of ESG management

Investment specialists such as rating agencies need accurate and up-to-date data in order to measure and evaluate assets according to ESG criteria. Even if extensive data is already available for liquid assets, this is not yet the case for illiquid assets such as private equities, infrastructure and real estate assets.

Consequently, the availability and access to data is a challenge for rating agencies. However, the data challenge for the successful integration and implementation of ESG strategies is also a challenge for investors and asset managers:

  • Data often originates from different sources, which makes the transparent and systematic collection and recording of ESG data very demanding
  • Data quality often suffers from the lack of a transparent data management system and poor communication
  • Excel spreadsheets frequently used for data management are susceptible to errors and not a reliable solution in the long term

Development of ESG management strategy

Developing and implementing an ESG strategy is not business as usual for either investors or asset managers. It’s noticeable that there are different levels of maturity in the implementation of ESG aspects, from initial reflections and measures to defined strategies and policies to an integral and holistic ESG management implemented throughout the entire investment lifecycle.

To learn more about the 5 Stages of ESG Maturity, check out The Way Forward for ESG: Firms Are Adapting Business Strategy and Boosting Technology Investment.

According to ESG experts, depending on the degree of maturity, different key questions will come into focus:

  • Initial strategic reflections – How can an ESG policy be effectively formulated and implemented?
  • Defined strategy/policy – How can the ESG perspective generate the greatest added value in the investment cycle?
  • Integrated ESG management – How can an investor make ESG an integral part of investment assessments and decisions?

Digital solutions for professional ESG management

One of the greatest challenges for professional ESG management, as outlined above, is the volume, complexity and aggregation of ESG data, and ensuring the quality and security of this data. In the course of digital transformation, software solutions are playing an increasingly central role in mastering these data challenges. Digital solutions can support the planning, controlling and management of data, enhance data quality by means of integrated plausibility checks and at the same time provide secure use of a great volume of data through data protection standards.

More on sustainable finance and ESG management

For more on the opportunities and challenges of ESG management, drivers and trends of sustainable finance and responsible investing, and how digital solutions can help with ESG data management and reporting, read The Role of Digital Transformation and ESG in Sustainable Finance.