ESG feature – Data
low, but it has improved drastically over the past five to seven years.” He puts this down to more companies committing to improving their ESG profile and wanting better relations with investors. “They are more engaged with data providers,” Elkayam says. Such commitments are ending Europe’s dominance in this area, with Elkayam saying that companies in North America are closing the transparency gap. As evidence, he points to the MSCI World, FTSE100 and S&P500. “If you compare some of the more critical ESG indicators, and how they have been reported on between 2017 to 2022, then you will see a gradual improvement in terms of consistency,” Elkayam says. But it is not perfect and, it appears, that non-financial data needs to be given the same level of importance as other disclo- sures to achieve the change needed. “Ultimately, we want ESG data to be treated as financials by companies,” Elkayam says, adding that he sees the need for further progress when com- paring the standard of ESG data to financial reports. “We do not consider ESG to be non-financial,” Elkayam says. “ESG is material, so it’s good to see that the number of times it’s been mentioned in corporate calls has exponentially increased over the last five to six years.”
Can we fix it?
One of the issues here is that British pension funds have been mandated to disclose how they are protecting savers from the impact of climate change. They need such data, whereas corpo- rates are yet to receive the same ruling on proving how they are shielding their shareholders from such risks. Reporting on a gender pay gap is one exception for corporates in the UK and shows that such a ruling can be made. Mandatory reporting of consistent, audited data which is released within a certain timeframe and standardised across all regions is needed to help investors form an accurate picture of the ESG risks they are exposed to. But achieving this could take time. Manuel points out that there are differences between the EU’s green taxonomy and the version due to be launched in the UK. “Most asset owners invest on a global basis,” Manuel says. “It is not, therefore, helpful if they are gathering information on underlying companies and portfolios which have reported across a patchwork of different disclosure frameworks.” Standard setters, like the International Sustainability Stand- ards Board, are trying to set a universal standard in the ESG data space, but would regulators adopt such a benchmark in their jurisdiction?
“It needs a framework for mandatory disclosure,” Manuel says. “It needs jurisdictions to work together in bringing some con- sistency to what they are asking corporates and investors to disclose.”
34 | portfolio institutional | March 2023 | Issue 121
This is not just about reporting data, it’s what is reported along- side it that is the issue. When carbon emissions are disclosed, typically, what is released alongside the data is a measure of quality. It is just as important to refer to the quality indicator as it is to refer to the metric itself. “The thing with ESG data, like with any data, is that when you receive it, it’s important to also receive information on the quality of it,” Manuel says. The timeliness issue of such reporting also needs to be consid- ered. “A company could disclose fiscal year 2021 data today, as opposed to in 2022. There are no set rules on this,” says Hideki Suzuki of Manulife Investment Management. “[Regulators/standard setting bodies] need to send a clear mes- sage on not just what to disclose, such as the gender pay gap, but when to disclose it,” Suzuki adds. “It needs to be represent- ing the consolidated group basis data on a fiscal year end basis.” Without this, how can such data be comparable? “There are a lot of regulations around what to disclose, but not much emphasis on how to disclose it,” Suzuki says. “Regula- tors are not sending a clear message. The data released needs to be on par with financial disclosures in that it should be audited and aligned with the fiscal year end.”
Beyond carbon Responsible investing is not just about carbon. Boardroom diversity, water consumption and waste management are other issues that help create an ESG profile. The performance of an asset’s social factors is not as easy to form a picture of compared to measuring climate impact. Reporting how many employees a company has and where they work in the corporate structure is not good enough to assess its social impact. “When investing in a company, a com- ponent of what it is delivering in terms of impact is the nature of the jobs it provides,” Manuel says, adding that corporate reporting likely does not include anything about the nature or the quality of those jobs. “It doesn’t give information on con- tracts, if they are permanent, temporary or zero hours. “And there is little reporting around things like the living wage or a safe working environment,” Manuel adds. The reason why carbon emissions come under more scrutiny than other environmental factors, such as water consumption, and the social elements of responsible investing is due to the impact it has on our world. Harmful gas emissions are also easier to measure than a social impact. “There is a greater standardisation of methodology there, which contributes to the greater focus that carbon data receives,” says Jennifer O’Neill, an associate partner at Aon. She adds that investors are in danger of developing a “carbon tunnel vision”. “In other words, investors and interested par- ties focus on carbon data because of that clarity and greater standardisation,” O’Neill says. “But there is a risk of missing
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