A rising tide of regulation is encouraging pension funds and insurers to evaluate their Environmental, Social and Governance (ESG) credentials, but this is often easier said than done. A major challenge is that regulatory ESG reporting is not uniform across the world and has a long way to go to match financial reporting.
CAMRADATA’s latest whitepaper, The Future of ESG Data, delves into how the investment industry can organise the growing amount of available ESG data into a meaningful part of the assessment process to try to solve this.
The whitepaper includes insights from firms including PGIM Quantitative Solutions, River and Mercantile, Our Carbon, Redington, South Yorkshire Pensions Authority, and Greater Gwent (Torfaen) Pension Fund who attended a virtual roundtable hosted by CAMRADATA in November.
The report highlights that although disclosure of financial data by publicly quoted companies has become fairly standardised around the world, corporate reporting on ESG, is far more variable. Even vendors of ESG data do not agree on how to interpret and weight these metrics.
Natasha Silva, Managing Director, Client Relations, CAMRADATA said, “The old saying goes that if you can’t measure it, you can’t manage it. This has long been an impediment to incorporating ESG data into portfolio analysis, and pension funds and insurers are often confronted with patchy data that leave them less confident in making holistic evaluations.
“However, as they are encouraged to make such evaluations and data providers start to improve the fact sets on which evaluations are based, something needs to change.
Our panel discussed the issues around uniformity of data and the rising levels of greenwashing, and what the industry can do to make ESG data more meaningful when it comes to assessing the future fortunes of investee companies.”
The event began by discussing the growing importance of ESG for asset owners and their asset managers who directly or indirectly provide long-term financing of companies and projects, and panellists were asked what three kinds of ESG data were most valuable to their work.
The panel then explored the distinction in patchiness of depth and breadth, how ESG data providers didn’t agree on aggregate scoring, inconsistency between providers and how ESG data from third-party vendors were useful as “soft” data, but there was very low correlation between vendors’ scoring systems.
Key takeaway points were:
- One panellist said that datasets had to have breadth, depth and comparability, and they rely on three kinds of ESG data – ‘hard’ data extracted from company reports; estimated and interpolated data, such as projections a company may make for its path to Net-Zero Carbon and ESG scores and more subjective analysis.
- Another panellist from a carbon advisory firm outlined their three sources – a company’s financial statements; interviews and coaching sessions with employees to better understand wider Scope III carbon emissions and the carbon emissions factors measured and reported by the UK’s Department for the Environment, Food & Rural Affairs (DEFRA).
- A pension fund consultant said that with regards to emissions data, investors do at last have a pretty standardised view of what they look like across markets. But they felt that metrics focused on people – the ‘S’ in ESG – were still lagging and remedial action was needed in this area.
- In terms of people metrics, another agreed there is a gap. They said questions most frequently asked by members – after those on emissions – tend to be about large corporates ripping off indigenous people or their own workforce. Having the metrics to agree with or rebut the accusations is helpful.
- Patchy data has always been troublesome for those used to audited financial numbers and seeking the same with regards to ESG. It was hard to be precise and specific about how and when ESG matters would have an impact on corporate fortunes.
- It was pointed out that the industry is moving towards something less patchy with the creation of the International Sustainability Standards Board, which is one of the most concrete outputs of COP26.
- The panellists agreed that ESG has a vital role to play engaging people within the investment world. They said while most people don’t engage with the numbers, stories engage them. ESG is the interface between the investment and the real world.
- As the pandemic persists, a panellist suggested that investors were realising society matters, and the ‘S’ in ESG was a big portion of future opportunities.
- A final point made was that 25 years ago the internet changed the world. Now there is a similar revolution happening because of sustainability. Investors are looking for those businesses that can make a good return solving the problems Climate Change brings. ‘S’ and ‘G’ were increasing considerations too.
Additional insight is offered in the whitepaper with two articles from the sponsors:
- PGIM Quantitative Solutions: ‘A Case Study in how Factor Scoring Techniques Can Overcome Investment Policy Constraints
- River and Mercantile: ‘Applying ESG factors to different asset classes’
To download the ‘The Future of ESG Data’ whitepaper click here.
For more information on CAMRADATA visit www.camradata.com