Data – ESG feature
ESG DATA: FULL DISCLOSURE
While quality has improved, investors are still faced with voluntary disclosures, estimates and a lack of global standards when it comes to data. Mark Dunne reports on the long journey to remove one of the biggest barriers to sustainable investing.
Sustainable investing could become a victim of its own success.
Institutional investors are bullish on assets that seek to protect the environment and promote greater equality. Indeed, 65% of inflows into European exchange-traded funds were for sustain- able vehicles during 2022, up from 51% a year earlier. This growth came despite the underperformance of such strategies, highlighting pension schemes’ long-term view. Yet this could have been higher. Investor confidence in achiev- ing their sustainable targets appears to be plagued with fears of greenwashing. Almost half (49%) of respondents told a Capital Group survey that a lack of robust ESG data is deterring them from increasing their exposure to such strategies. But while demand to build sustainable portfolios has grown rapidly on the back of stakeholder concerns, regulation has not moved as fast. The result is a lack of clear standards of what information corporates must disclose to help investors assess and monitor their ESG performance. There are disclosure frameworks, such as the Sustainability Accounting Standards Board, the Global Reporting Initiative, CDP and the Principles for Responsible Investment, which are all voluntary. Then there are stock exchanges, which require some ESG information to be disclosed, but this information varies between exchanges. “Unfortunately, even to this day, because it is self-disclosed data and is often not audited, it is incomparable. It is not perfect at this point,” says Hideki Suzuki, director of sustainable investing for public markets at Manulife Investment Management. Companies, even those in the same country, are not uniformly
reporting on the same aspects of their non-financial perfor- mance, if they are disclosing such data at all. And not all of what they do report is audited.
“There is quite a high level of inconsistency in corporate reporting,” says Dror Elkayam, global ESG analyst in the investment stewardship team at Legal & General Investment Management (LGIM), who explains that some companies issue specific information one year, but not the next. The age of data can be another challenge. Companies report at different times, so the latest emission results for one corporate could be a week old, while the same data for another could have been published more than a year ago making a compari- son impossible. Aon, an investment consultancy, helps its clients dive into the detail of individual assets or companies they invest in, and examine the data disclosed across portfolios. “One of the chal- lenges for pension funds and asset owners is getting a handle on the quality and nature of the data that is being aggregated to give you that portfolio view,” says Tim Manuel, Aon’s head of responsible investment.
An issue made all the more challenging considering the incon- sistencies in disclosures when assessing a portfolio. “There is a big challenge in how to fill in the gaps with data in a fair, rep- resentative and appropriate way,” Manuel says.
A material issue Yet it appears that despite these issues, the quality of non-fi- nancial corporate data has improved, Elkayam says. “Ten years ago, I would have said that standards were concerning or pretty
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