Since the start, a common problem with ESG investing has been the absence of a common definition of the terms: "environment," "society" and "governance." With greenwashing concerns weighing on minds, this is becoming a more urgent concern.
ESG data limitations and a lack of standardised reporting frameworks in many asset classes are the biggest challenges for investment managers, a global study of hundreds of firms says.
According to a survey of 236 asset managers by Russell Investments, the portfolio carbon intensity measure is largely underreported outside of listed equities and corporate bonds due to data limitations and non-standardised reporting frameworks, making it difficult for investment firms to meet the stricter ESG regulations coming into force in 2023.
The survey found that carbon emissions data (87 per cent) is currently the most highly reported ESG metric. Carbon intensity is being reported by most firms investing in listed corporate securities.
While not the first time that complaints have been made about the lack of common reporting standards for ESG being a problem, the sheer volume of the firms surveyed adds further fuel to calls for change. Recent controversies about "greenwashing" – making investments look "greener" than they really are – also highlight a need to lock standards down.
“The results highlight further improvements are still needed around ESG data. In the corporate bonds space, there are still several challenges such as disclosure practices in privately held companies or applying carbon measures in green bonds. Outside corporate issuers, ESG-related reporting continues to evolve in an unstructured fashion due to the absence of clear industry standards. There are some proposed frameworks to account for sovereign issuers’ emissions which is a welcome development,” Yoshie Phillips, head of fixed income ESG investing at Russell Investments, said.
While carbon emissions data captures a snapshot of an entity, the survey reveals a growing trend towards evaluating the energy transition with forward-looking views, as suggested by the increase of asset managers collaborating with industry organisations focused on the energy transition.
“During our conversations with asset managers, we often hear about the challenges of third-party ESG data providers’ outputs and how they try to augment it with their in-house forward-looking ESG analysis,” Phillips said. “We are seeing more support for standardised disclosures in key ESG metrics,” he continued.
On the EU's Sustainable Finance Disclosure Regulation, which comes into force next year, the survey revealed mixed results in terms of existing products meeting clients’ sustainability preferences under the updated EU MiFID rules.
Focus on climate
The findings show that investors are very much focused on climate and environmental considerations more broadly, and other ESG concerns do not resonate nearly as strongly anywhere. Climate risk is the dominant theme among respondents in Canada, the United Kingdom and Australia. In Europe, climate change combined with wider environmental issues top the list of investors’ concerns, the survey shows.
Among other ESG matters, US respondents reported relatively higher engagement from clients on areas related to diversity, equity and inclusion.
The survey also shows growing efforts to incorporate DEI practices in asset management. Among those reporting their DEI statistics, 54 per cent have fewer than 20 per cent of women and 40 per cent have fewer than 20 per cent of ethnic minorities in their investment teams. Meanwhile, 4 per cent of the respondents have more than 40 per cent of women and 17 per cent have more than 40 per cent of ethnic minorities in their investment teams.
Phillips added: “This year’s results reveal that the ESG journey is continuing at a markedly escalated pace, with regulators across the globe aggressively stepping in to try defining sustainable investing and to increase disclosure requirements, and asset managers trying to keep up. In that process, more discussions are happening among the asset management community to address the challenges, especially around ESG data and reporting standard frameworks. Our survey also indicates client demand and risk mitigation are among the key reasons that asset managers are integrating ESG factors into investment processes.”
Jihan Diolosa, head of global ESG strategy at Russell Investments, added: “As ESG integration reaches universal recognition within the asset management community, there remains a very diverse range of views as to how these considerations should be addressed. In addition, we see significant variation in the underlying client needs which asset managers are having to cater for. This poses a real challenge for managers – one of the big issues identified in our survey – and has led to a rapid growth in the number of ESG and sustainable solutions as investment providers seek to meet these needs. An in-depth understanding of these approaches, their merits and limitations is now more important than ever to help investors meet their long-term goals.”
Russell Investments’ annual ESG manager survey offers a broad representation of the industry by asset size, region and investment strategy offerings. About 30 per cent of the 236 respondents have less than $10 billion in assets under management, while 33 per cent have more than $100 billion in AuM. In terms of products, 184 offer equity strategies,147 offer fixed income strategies, 77 offer private markets strategies and 66 offer real assets strategies.