Do ESG megatrends influence investment decisions?

ESG megatrends

April 06, 2015

In Do ESG megatrends influence investment decisions? the PRI has summarised the responses of 130 investment professionals on global megatrends in the energy sector, the investment strategies of oil majors and which key factors they integrate into their energy company valuations.

During the 2013/14 PRI reporting cycle, 81% of signatories who completed the Listed Equity module of the reporting framework said that they were integrating environmental, social and governance (ESG) factors into their listed equity investments. While this indicates a strong commitment to ESG integration, it is not clear if ESG risks and drivers are being systematically valued by managers and analysts and whether ESG factors really have a material impact on company valuations.

To better understand the current state of ESG integration, we held a workshop at our 2014 annual meeting to find out which factors – ESG included – were actively analysed and integrated into valuations of energy companies and if these valuations were impacting investment decisions.

We found that even though investors acknowledge environmental megatrends in the sector – including carbon risk, competition from renewables and geopolitical risk – ultimately, the biggest impact on valuation models are still the traditional profitability drivers. However, participant recognition of megatrends for the sector seem to indicate that environmental factors will have a stronger influence on valuations in the near future.