There can be no doubt that ESG data is of growing importance to investors in the modern marketplace, being, as it is, an attempt to numerate the long-term material risks posed to an investment target by environmental, social and governance factors.
Yet there are still investors who, for one reason or another, feel that the challenges posed by fully integrating ESG information into their investment decisions still outweighs the potential benefits.
A recent webinar hosted by Refinitiv, formerly Thomson Reuters, and Responsible Investor saw four expert panelists explore some of these challenges in more depth. As surmised by Annie Bersagel, Senior Analyst – Responsible Investments at Folketrygdfondet, Asset Manager for the Norwegian Government’s pension fund, these challenges broadly fall into three categories: the quality of data, the timeliness of its availability, and ensuring its relevance.
High quality data
On the topic of quality, one pressing challenge is to replicate the deep knowledge that investors and analysts have of a given region, sector or company in ESG data.
“A lot of off-the-shelf ESG tools just aren’t really fit for our purposes,” said Bersagel. “We definitely observe a gap between the financial analysts on one hand, who know the companies and industry well but have a limited understanding of ESG, and then ESG service providers on the other, who can be a bit too far removed from the company and don’t seem to really always understand the business model or the ownership structure.”
Refinitiv’s Global Head of ESG, Elena Philipova, echoed her points, adding that often companies can be slow to recognize the business case for enhancing their disclosures with ESG information.
“My view is that until the ESG message has financial impact for analysts and investors, then incentives will be limited for companies to pitch their ESG story,” she added.
So, what can change that paradigm? Regulation is one route, as is the pioneering work done by organizations such as the Sustainability Accounting Standards Board (SASB) and its ESG Materiality Framework, or the Global Reporting Initiative.
From the investor end, being able to seamlessly integrate ESG information into investment decisions can be crucial, particularly if such information is transparent and traceable back to the corporate disclosure. Providers such as Refinitiv, with its ESG database, are increasingly allowing investors to do this, and improving the quality and understanding of sustainability data in the investment chain.
Another problem frequently encountered is that of timeliness, or the consideration of short- and long-term timelines on the data that is both being disclosed and being assimilated by investors.
For investors such as Folketrygdfondet, Bersagel said, forward-looking targets and an account of how they were (or were not) met is a hallmark of the best corporate reporting as they provide clear, measurable criteria by which she can track a company’s progress over time.
And this need not be limited to ESG information alone – Bersagel highlights that some companies set and track targets for health and safety practices, too. “It’s also something that we asked of companies in terms of their capital structure and dividend policy, a forward-looking goal for that and where they want to be,” she added.
Linking such data points into company strategy is one way to do this, as several panelists pointed out – but what about getting companies to track or act upon information that might not become relevant until at least the mid-term?
“I believe that once the problem hits our backyard that’s when we respond,” said Philipova, adding that while the “E” and “G” of ESG have begun to hit and promote corporate responsiveness, the “S” is not quite so visible yet.
Keeping it relevant
This level of refocusing may require a more top-down approach to sustainable investing and recognition of the power of capital to enforce change, something that will require long-term work to achieve.
As Bersagel pointed out, making ESG data relevant to investors’ individual strategies is also crucial to making it a more universal consideration.
“What’s relevant for Folketrygdfondet is not necessarily going to be relevant for a global, passively-managed portfolio or for, say, an emerging markets impact investor,” she added.
The role of matching the right metrics to an investor’ interests is one that data providers are increasingly taking on. However, as Philipova pointed out, some may try and fit information points of different shapes and sizes into a “one-size-fits-all” model, which can lead to confusion and misleading signals especially if transparency in the methodology is lacking.
“We believe that it’s essential to integrate the information and overlay it with the individual investor’s know-how to generate the optimal results,” she added. That way, investors can be left to make decisions that still make sense to them while remaining open to the potential long-term impacts of ESG risks and opportunities in their portfolios.
Picking a good data source is a good first step, concluded Philipova, but the opportunity is there for the whole of the capital markets to capitalize upon. “We should make a change in the way that we think about sustainable investing and the power of capital to enforce change,” she said.
Refintiv’s ESG Data can help you find indicators of a company’s long-term financial performance. With customizable and transparent metrics, Refinitiv’s ESG data can help you overcome ESG challenges the industry is facing. And help you with the basis of your investment products with our Index Services business and ESG Indices.
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