The financial intermediation chain

Responsible investments are mainstreaming the financial market, turning capital into a larger purpose than just financial return by adding environmental, social and governmental issues in the spectrum. But where do the influence and directives come from and who influences whom? This is what will be discussed in this post.

With ESG first being mentioned in 2004 by the UN report, who cares wins, it has grown successfully as an approach for responsible investing. The surge in ESG related work and its impact on the financial market has generated several approaches and frameworks for responsible investment strategies (read more).

Responsible investments have grown increasingly in correspondence to market awareness and demand as well as in accordance with the surge of market regulations and opportunities of financial materiality. Just by July this year ESG-incorporated assets held in exchange-traded funds and financial products surpassed $100 billion globally. Additionally, responsible investments will be much important in order to reach the sustainable development goals due in this decade. With this said, one can assume that responsible investments will be the new normal of investments.

The development of responsible investments origins from multiple actors in the financial market. The progress is followed by an urge for sustainable investments by asset owners (individual, non-professional investors).

Source: Adapted from OECD 2020

From the annual OECD Business and Finance Outlook 2020, the structure of the ESG finance is charted in a financial intermediate chain, illustrating the chain from issuers to asset owners (or let’s say companies to individual investors to make it real simple).

  • To begin with, the chain consists of the issuers, which considers all issuers acting on the financial market by supplying shares or bonds. The issuers are the ones taking ESG-issues into practice.

  • Rating providers and indices-constructors provide rates, data, indices and assessments of ESG practices and efforts of the issuers. They provide frameworks and benchmarks for asset managers and owners.

  • Asset managers manage assets and construct ESG portfolios. They use ESG assessments, data and indices in their investment decisions.

  • Asset owners are the end investors. They are either institutional investors or individual, non-professional investors buying stocks or shares in funds. They are important stakeholders and have the ability to influence the whole financial intermediate chain.

Active ownership & the financial intermediate chain

Active ownership is a strategy for investors to keep control over the financial intermediate chain in a responsible manner. Through active ownership, investors interact with issuers in order to influence in a sustainable direction. This approach includes engagements and voting. It sets a common language and vision for both investors and issuers and is an efficient way to reduce risks, increase returns and make an impact.

That is how the financial market, issuers institutional investors and asset owners together, contribute to sustainability. It is a win-win-win situation for all partners involved.