ESG Feature


Sustainable investing has a problem. Institutional investors setting policies that forbid them from backing excessive green- house gas emitters, companies lacking diversity in their leader- ship team or those with children working in their supply chain is as easy as uploading a statement to a website. Proving that your capital is being invested within the boundaries of such policies is a lot harder. Corporate strategies may be evolving from pleasing sharehold- ers to also keeping employees, consumers and local communi- ties happy, but one issue will not change: investors will always want to measure the performance of their portfolio. The grow- ing focus on the non-financial aspects of corporate life is where the problem lies with sustainable-led investing. There are very few regulations forcing corporates to release information on how they are protecting the planet or building a better society, but this is changing. Some investors did not see the scandal coming at fashion house Boohoo this year and were happy to hold the stock. But an investigation by the Sunday Times found severe shortfalls of health and safety practices in factories making clothes for the retailer while workers were being paid well below the living wage. When the scandal broke, investors lost money and Boohoo had to mount a huge PR campaign. To avoid a repeat, regulators are increasingly making pension schemes responsible for ensuring that the corporates they invest in are performing sustainably. Earlier this year, The Pen- sions Regulator outlined that it expects trustees to explain how they are protecting their members’ retirement funds from cli- mate risk. This requires data, so it is a case of hand it over or you will not see our money.


“The whole thrust of the regulations around sustainability and climate at the moment centres on transparency and disclo- sure,” says Tim Manuel, head of responsible investment in the UK for Aon. “That is one of the fundamental pillars of almost every piece of legislation that is coming out at the moment. “The changing tactics of regulators has been to target asset owners rather than necessarily target companies. It is impos- ing that requirement on the people at the top of the decision- making pyramid.” “As pension funds need to disclose information, they put pres- sure on the people who serve them, like asset managers and investment consultants, to help find the answers. “Ultimately, for pension schemes to disclose, they need that data disclosed by the companies that they are investing in,” he adds. “Currently, the level of disclosure from companies is inadequate.” Greenhouse gas emissions is the only factor where it is manda- tory to report. It is also easy to calculate, making Scope 1 [emis- sions a company generates] and Scope 2 [emissions from energy bought by a company] more easily measurable and


30 | portfolio institutional November 2020 | issue 98


definable. Scope 3 emissions, which are harmful gases released by sources not owned or controlled by the company, are more difficult to assess and so only a small number of companies attempt to. “Even then you find a range of approaches and methodologies among such a small sample, so trying to aggregate in a sensi- ble way is a challenge if you are trying to look at something from a portfolio perspective,” Manuel says. “Greenhouse gas emissions are probably the best piece in terms of disclosure, but there are so many other dimensions of sustainability that investors want to know about in terms of the companies they put their money into.” This includes waste management, where, Manuel says, details on recycling are “sparsely” reported. How much of the world’s scarce resources are used by companies is another area of interest as is how well employees are treated. “If you scour a company’s sustainability reports you might find a mention of some of these factors, but it is manual job to get this data, so it is hard to compare and contrast within a portfo- lio,” he adds.


Wish list


There are factors that are relevant to almost all sectors, such as climate change risk, workforce diversity and good governance. But with ESG being such a broad church, the importance of i ndividual ESG metrics varies from industry to industry. In mining, for example, water and energy usage, health and safety and local community interaction are key concerns. In financial services, data security will be paramount, as is making sure that people are not sold unsuitable products. “There is no one-size-fits-all approach to ESG,” says Gabriel


Do I think the world would be a better place if every ESG data provider gave the same output? No, I do not. Tim Manuel, Aon


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52