By Refinitiv -March 6, 2020
- Our LinkedIn audience answered five questions on the current state of ESG investing, including how to manage gaps in the disclosure of ESG data.
- The LinkedIn chat questioned whether asset managers were actively pricing climate change risks into their investment decisions and portfolios.
- The discussion concluded that ESG compliance was now a vital consideration for any organization looking to progress and grow in the coming decade and beyond.
Financial professionals are increasingly differentiating their services using environmental, social and governance (ESG) criteria.
But how is it possible to show sustainable leadership when the screening of corporate performance involves so many different data points, ranging from emission levels through to diversity, business ethics and corporate governance?
Over the course of five days, our recent LinkedIn discussion examined the current state of ESG investing with the help of our 96,000 followers and several members of the #RefinitivSocial100 group of social influencers.
We asked five questions during the week, including on the challenges of ESG data and reporting, the pricing of climate risks in investment decision-making, and the benchmarks required for robust ESG investing.
Those involved included David Doughty, corporate governance expert; John McLean, Managing Director at ACRe Data, a provider of alt data for the U.S. Municipal market; Will Rowlands-Rees, a specialist in qualitative and actionable insight for sell-side, buy-side, and corporates; James d’Ath, founder of Sustainix, a research services business with expertise in sustainable investment; and Debra Ruh, founder of a strategic consulting firm specializing in disability inclusion.
From Refinitiv, we heard from Hugh Smith, ESG, Investment Management, Americas; Franita Neuville, Investment & Advisory Performance Director, MEA; Leon Saunders Calvert, Head of Sustainable Investing & Fund Ratings; Elena Philipova, Global Head of ESG Proposition; and Luke Manning, Global Head of Sustainability and Enterprise Risk.
Thank you to all those who contributed to the #SustainableLeadership discussion — and remember, it’s not too late to keep the conversation going.
Q1: ESG data issues: How do investors manage data gaps?
David Doughty set the tone for this discussion with his ‘no-nonsense’ reply: He said:
Ideally, by not investing in companies where insufficient ESG data is available — in practice, by not guessing or taking a gamble.
This sentiment was echoed by Leon Saunders Calvert, who expanded on this mentality:
If ESG is to be treated as investment-grade, fundamental data, which is material to investment allocation decisions, then non-disclosure of material data points should cause skepticism as to whether to invest.
You wouldn’t invest in companies that didn’t report their core financial data. So, if you are a ‘values’-based investor you cannot very well invest in companies which don’t detail material information.
While this hard-line approach to data gaps was prevalent, there were some who saw positive possibilities, as Elena Philipova explains:
ESG data gaps present challenges, but more importantly, create opportunities for investors — to sustain financial stability and grow, to differentiate and innovate, and to better serve the changing needs of the customers.
The industry is booming with innovation, and ESG is arguably one of the most exciting and critical areas to be in for the foreseeable future.
Q2: What can you do to encourage your investment options to report on their ESG performance?
On encouraging investment options to provide greater clarity through ESG reporting, most participants agreed that reinforcing the modern relevance and importance of ESG compliance was the first step towards promoting positive change. Luke Manning summarized:
Businesses can no longer afford to ignore environmental and social considerations, or not communicate about them. The simple truth is the world will be powered, resourced and fed in a different way in the future. Businesses will have to adapt, and will have to be very transparent in the process.
But does the responsibility for this lie beyond investors? John McLean explained why he sees this job as a group endeavor:
The focus cannot be primarily on corporations. Governments large and many small, may not have the resources, know-how, or incentive to self-report on ESG facets. ESG is undoubtedly here to stay, and is the new focus for investing, but we investors/alt data vendors may have to continue to do much of the reporting for the non-corporate world.
Q3: Is an ESG view of a company vital for an accurate long-term view?
Support for ESG analysis as standard for businesses was unanimous, with many including Will Rowlands-Rees viewing it as an essential means of monitoring and regulating an organization’s decision-making processes:
Besides the obvious lens on outcomes, what ESG analysis does for the first time is allow outside investors a view on the quality of decision making in the organization on their strategy vs. just a view on the outcomes, which is what traditional 10K/Q and equivalent analysis provides. It’s a great proxy to understand if a company has fully thought through the potential outcomes of a strategy.
What is it that makes ESG such an integral part of any long-term business operation? Elena Philipova shared her view:
ESG data represents the long-term health of businesses, while financials paint the short-term skeleton of companies. Both data sets are fundamentally important to valuate correctly the investment options, for capital preservation, and impactful capital allocation, which will deliver sustainable economic and social growth.
Following on from this, an important point was raised:
I think the important question here is: Do investors have the information and tools required to objectively assess, at scale, the ESG profiles and thus the long-term health of their investment options and portfolios?
With a strong consensus in favor of normalizing businesses’ relationship with ESG, it would appear that understanding is already prevalent; the biggest challenge could be putting this shift of mindset into practice.
Q4: How are asset managers pricing climate risks into their investment decisions and portfolios?
Everybody talks about the weather, but nobody does anything about it.
James d’Ath used Mark Twain’s musings to begin his observations on the relationship between asset managers and climate risks:
Everybody is talking about it, less though are actively engaging. However, change is coming. How managers seek to engage will ultimately depend on their ability to understand the full impact of climate change across their portfolios. Risk, after all, varies inversely with knowledge.
This time around, there seemed to be a more prevailing agreement that acceptance and action in this area were lagging, as Debra Ruh summed up:
Some investors are stepping up with impact investing, but most are still not engaged in these conversations in a meaningful way.
However, she suggests this mindset can be changed, adding:
I believe investors, funders, philanthropists, can all add value to the social impact and green conversations. It is also critical for impact investors to understand the UN SDGs and engage in Climate Action activities.
Whether this conversation is being actively driven or not, John McLean explained why he believes the issue will soon be impossible to ignore:
To answer the question — no — climate change is not yet priced into portfolios and investment decisions. But it will be soon, and those left last to understand the valuation risk, will be left holding an asset that is priced at a much wider spread or lower valuation, with many questions to be answered by devastated stakeholders.
Q5: What standards are investors benchmarking against? And what ESG regulation is coming?
Our final question looked at regulation and measurement of ESG — both now and looking forward. Participants concurred that more regulation was on the horizon, but current benchmarks are lacking at best — and absent at worst.
John McLean led with his first-hand benchmarking experience:
Current benchmarks for ESG — at least in municipals bonds — are absent and, if present at all, are in-house designed with no street standards. What regulation is forthcoming will be most likely very little.
IOSCO standards for benchmarking will have the indices that utilize ESG, ensuring that transparency and robustness exist. Beyond that, unless there is an industry standard created among vendors, it will be difficult for clients to compare one ESG provider to the next.
David Doughty echoed the opinion that there is still some way to go to bring measurement standards up-to-scratch:
The UK Corporate Governance Code provides some measures in terms of the G of ESG for governance, and is making some moves towards the S for social measures, such as corporate culture, diversity, and gender and ethnic pay-gap reporting. More needs to be done, especially on the E for environmental impact measures.
If current standards and guidance for ESG measurement are lacking, where should benchmarking begin? Hugh Smith shared his thoughts:
A simple place to start would be whatever index you benchmark your performance to. If you are a U.S. large cap equity manager striving to outperform the S&P500 in terms of return, you can also compare your performance in terms of things like emissions intensity, diversity at different levels of seniority, board independence etc., and strive to outperform the benchmark on these metrics, too.
Disclosing relative performance against these metrics to clients also helps investors understand what effect or impact ESG integration is really having.
ESG investing: What did we learn?
The message shared from everybody who participated in our LinkedIn discussion throughout the week was clear — change is already here. ESG compliance and transparency is now a vital consideration for any organization looking to progress and grow throughout the coming decade and beyond.
As we move into the 2020s, investors are putting far greater stock in the ethical, sustainable nature of business, which can only be a good thing.