ESG feature – Data
out on significant other forms of data to consider when you are thinking about constructing a sustainable portfolio. “For instance, biodiversity loss is intrinsically linked to climate change, so focusing solely on carbon emissions doesn’t neces- sarily do anything to address that issue,” O’Neill adds. Another issue on why some issues, such as carbon emissions, have more transparency than other elements is due to their maturity. “Some datasets can be more challenging, because they are newer, while some are more mature,” Elkayam says. “The inde- pendence of directors or women on the board, for example, are quite mature datasets, so the quality is fairly high.” This is evident in the S of ESG. “In diversity on the board or at an executive level, we are seeing an evolution in the way diver- sity is being measured, not just from a gender perspective, but ethnicity, too,” Elkayam says.
“This is a relatively new element of disclosure and we expect it to increase in coverage, accuracy and quality” he adds. “But this is one of the most important growing elements in the S, along with paying a living wage and how you onboard employ- ees considering their background and equality in the business.”
What’s the score?
Data is not just about corporate disclosures. The other side of it are the opinions of third parties on how an asset is perform- ing, commonly known as ESG ratings or ESG scores. When it comes to sustainability there is more to a company than what it sells. Tesla is an example. One ESG ratings provider points to its positive climate impact because it makes electric-powered cars. Yet another points to the chief executive also being the company’s largest shareholder, which is far from ideal from a governance perspective. So it is common for pro- viders to form different conclusions about a company. “Depending on the methodologies ratings providers use, your opinion could be different,” Suzuki says. “You could disagree with one provider but agree with another. It is a matter of being comfortable with the providers we utilise.
“This is why we only use the ratings as a starting point. It is not the end result,” he adds. “You have to unpack it because there is no one simple number that explains everything about a compa- ny’s ESG activities. That is impossible, but it gives you an idea.” ESG scores are also weighted differently depending on sector and the provider’s proprietary methodology. “Investors need to be aware of that, understand what it looks like and the rationale for it to determine which provider they wish to use,” O’Neill says. “It’s not simple, and it shouldn’t be,” she adds. “Sometimes simplicity creates pitfalls.” LGIM produces its own ESG ratings. Elkayam is confident that
36 | portfolio institutional | March 2023 | Issue 121
the data LGIM has is of good quality. This is partially due to the asset managers working with policymakers and regulators on certain aspects of ESG disclosure in a bid to improve the qual- ity and breadth of ESG-linked disclosures. Manulife Investment Management also sets its own ESG rat- ings, which Suzuki describes as “not easy but doable”. “As long as we have the company disclosed quantitative data, we are able to aggregate that on the portfolio level,” he adds. “It becomes challenging when there is not much data for us to work with.” He points to gender pay gap, which less than 20% of MSCI World index constituents disclose. “When there is a noticeable data gap, there is a challenge in interpreting the result of aggregated data.” Manulife Investment Management is also active when it comes to making an assessment. The asset manager researches com- panies beyond just reading a provider’s research report by con- suming primary sources disclosed by companies and also engaging with those companies, Suzuki says.
No right or wrong
When it comes to data, no matter how much you do or do not have, it is what you do with it that is important. “There is a dan- ger in saying the data is right or wrong,” Manuel says. “The data is what the data is. It is what has been collected. “The challenge is using that data effectively for the decisions we are trying to make,” he adds. “How does this piece of data fit into the overall puzzle to support the decisions we are trying to make as a pension fund? “We are not being driven by the data, we are being informed by it to the extent that we understand the nature and the quality of what is being provided,” Manuel says. It depends on what investors are using ESG data for: Invest- ing? Engagement? Research? It is about what is underpinning the ratings, what goes into it. How has it been calculated? What indicators does the provider use?
“ESG scores or ratings mean different things,” Manuel says. “If you are going to use them properly, you need to understand exactly what they are. Too many shortcuts and too many simpli- fications in how they are applied runs the risk of those ratings or scores being misused. There is no shortcut to digging into what these scores mean.”
The rapid growth in the level of capital targeting sustainable assets has made this a mainstream asset class, but when such growth occurs the infrastructure and supporting ele- ments do not always improve at the same pace. Regulation and standardisation of non-financial data needs to improve, but it took decades for a universal financial accounting stand- ard to be agreed. The quality and transparency of ESG data has improved and will continue to do so, but investors will need to be patient.
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