Today’s leading companies and investors/investment managers have a broader, more accurate understanding of risk and return–in short, they consider sustainability factors. In finance, the term ESG is often used in reference to sustainability and refers to a particular investment’s environmental, social, and governance risk profile. ESG is relevant to investors and investment managers because it can help to better meet client needs, manage risks, and identify new opportunities for returns.

Sophisticated investors incorporate sustainability/ESG data into their investment decisions. In order to responsibly invest, ESG data, methodologies and processes will need to be incorporated into investment models, but there are some limitations in doing so.

When evaluated, sustainability data influences a firm’s cost of capital. This trend has created sustainability-linked financial instruments in the form of bonds and loans. Sustainability data has also contributed to the borrowing concept of microfinance, which offers financial services to low-income individuals.

Sustainability/ESG factors impact investor decision-making and company project selection by identifying financial risks and earnings opportunities that could be missed in traditional investment models. ESG integration can improve accuracy when used alongside traditional valuation techniques, financial ratios calculations, and industry analysis.

Linking sustainability to financial outcomes accurately requires that the data used for linking is accurate. At this point in time, various data limitations exist with the information that companies release to investors. The most apparent solution to this problem is bringing transparency and consistency to disclosures as well as encouraging Sustainable Development Goals (SDGs) for companies.