A lack of high-quality, reliable data on how firms shape up in terms of environmental, social and other tests is holding growth of new investment models back, a report warns.
The weight of money in environmental, social and governance-themed investment is growing, but it is still a relatively niche area. Asset managers complain that patchy and insufficient data hampers efforts to make this approach more mainstream, a new report says.
The number of ESG-based assets rose by 37 per cent year-on-year in 2017, reaching $445 billion, outpacing the 23 per cent rise in the MSCI World Index of developed countries’ equities. Twice as many ESG-themed funds were launched in 2017 than was the case in 2014, with exchange-traded funds proving a popular channel.
On the face of it then, ESG is on a roll but a new report warns that while there is lots of progress, poor data is a drag factor.
The World Resources Institute, a global research body, has issued a report, What Investors Want from Sustainable Data, drawing comments from more than 30 practitioners from 25 firms, including institutional asset owners, pension fund managers, asset managers, investment advisors and data firms. In total, the organisations questioned manage $5.2 trillion in assets.
Wealth managers are developing ESG offerings as a way of attracting new investors – such as Millennials who are considered to be more fired up about such issues than their older peers. It seems now that almost no major wealth manager does not have an ESG offering or is not developing one. To give just one example of a firm touting its work in the space, see this interview with Indosuez Wealth Management. Late last year, Aite Group, the consultancy, said that environmental, social, and governance strategies are becoming increasingly adopted by the wealth management sector. “Overall, individual firms’ approaches can vary significantly, along with the extent to which investment analysis is performed. But there is a growing recognition that ESG factors can be material to investment performance, as well as risk, and that integrating such factors into the investment process aligns with a long-term investment horizon,” Aite said.
The WRI report said that available information about firms’ conduct is uneven and incomplete, with many businesses silent on their environmental practices; reporting methods are not consistent; sustainability data appears to be unreliable, with too many firms choosing to tick boxes rather than give more detailed answers and ratings from data firms are not consistent or reliable.
More positively, there are efforts to improve consistency and reliability of information, with global frameworks such as those given by the Global Reporting Initiative and Sustainable Accounting Standards Board proving beneficial, the report said. A number of investor initiatives to drive change are in place, such as a ShareAction report (February 2017), Banking on a Low Carbon Future, which explains how investors can engage with banks on climate change.
“[Some] 85 per cent of S&P 500 companies now publish sustainability reports, up from 20 per cent in 2011. Despite this mutual interest, investors and firms share a palpable sense that limitations on ESG data are preventing true scaling and mainstreaming,” the report said.
But initiatives are helping, it continued. “Collectively, these initiatives are facilitating improved reporting on sustainability, which is becoming standard practice. In 2017, 85 per cent of S&P 500 Index® companies published sustainability reports, up from 20 per cent in 2011. Reporting rates at a global level are not far behind. And while not all companies use standard frameworks, more are beginning to. Already, 74 per cent of the world’s 200 largest companies use The GRI [Global Reporting Initiative] Standards for sustainability reporting,” it said.