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ESG Investing Needs to Expand Its Definition of Materiality

Finance is thinking seriously about social factors in investment

Environment, Social, and Governance (ESG) investing—an approach to investing designed to consider a wider set of factors that influence financial returns—is everywhere. ESG is so hot, it will be a $1 trillion market by 2030. Finally, it seems, finance is thinking seriously about social factors in investment.

But whilst "ESG goes mainstream" is an attractive and seemingly good-news headline, the reality so far is mixed at best, underwhelming at worst. Specifically, the way the ESG market has developed limits the potential benefits these trillions of dollars of capital could have on society and the planet.

These limitations exist for two primary reasons. First, because only factors that affect financial returns are considered “material” for ESG investors. And second, because the S in ESG remains woefully underdeveloped.

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