ESG Feature
part of the strategy. A lack of disclosure makes this a challenge. “It can be harder to benchmark, harder to map progress and harder engage with the objective of driving change because you do not know where the base line is,” Wilson-Otto says. “It is easy for a company to say that they have improved if they have not given you any data to evaluate that improvement. “Regulation is one element that may improve the availability of data, but it may not improve engagement with the data,” he adds. “What we want to avoid is a compliance mindset with regards to dealing with ESG data. As investors we are looking for strategic engagement with the underlying issue, which can help mitigate some of those risks. Regulation could be a great way of directing attention and providing data, but it has to be focused on quantitative of data.” He welcomes the Task Force on Climate-related Financial Dis- closures, which includes governance and oversight in data recording, so more of a discussion of why the data is material to the company and how it is factored into their risk and strate- gic decisions. But it is not just about regulation. “Influence from investors and stakeholders can play an important part here,” Wilson-Otto says. “One of the key problems that we find is that companies are saying there is no point recording all this data because not many people ask for it and it is another complex burden that they have to bear. Increasingly, as investors and stakeholder demand the data it will start influencing the ESG rating and will lead more to an internal argument and internal justification.
“Education is required,” he adds. “ESG risk is not just about disclosure and compliance, it is a strategic exercise. We want issuers to see that a lot of the ESG analysis and corporate trans- parency is not only a regulatory requirement but as a way of better assessing the risk that they will be exposed to in the future. This should be very much part of the strategic everyday operations for the business. “That mindset shift is happening, but it still needs more capac- ity building globally,” he adds. Could the new European Mandatory Disclosure Regime help create capacity? It proposes disclosures across all entities with- in the financial system, including pension funds, investment funds and financial services firms. “It is the whole of system regulation that is needed to make sure that disclosure in one part of the system helps support disclosure from elsewhere,” Manuel says. For Wilson-Otto, this is a step in the right direction. “It is diffi- cult for an asset manager to report meaningfully on the com- position of the portfolio if they do not have granular detail from the portfolio companies on their performance, so it ends up being estimates built on estimates, which can be indicative but may not be precise. As the data environment improves, the
framework that is being put in place now will be increasingly neutral and will provide a real insight into the comparative per- formance and structure of funds and underlying issuers.”
An independent view One area where pension schemes can source the data they need is from independent providers. Yet these companies have different approaches to collecting and interpreting the data, which means the outputs vary. “Some commentators say that is a problem, but I don’t think it is,” Manuel says. “It means that it is important to understand the methodology they have taken in their approach. You cannot take the output at face value you need to consider it within the methodology that they have used to create that output. “The range of providers gives people a choice to find a method- ology that aligns with what they themselves have tried to achieve in using that data.
“Do I think the world would be a better place if every ESG data provider gave the same output? No, I do not,” Manual says. Manulife Investment Management assesses independent ESG data from several sources, which helps the firm to mitigate against bias risk. “I try to differentiate between what is truly a weakness, an area in need of improvement or a lack of disclo- sure or perception of risk. We need to distinguish between that,” Isleib says. BNP Paribas AM relies on a combination of third-party data providers for the raw underlying data on the companies it cov- ers. The asset manager has its own people looking at ESG issues in each sector allowing them to enhance that data. It looks at the raw underlying data on the performance of a company rather than their views and assessment of an issue. “We do find bias typically to do with company size, region and sector. We try to minimise in the construction of our ESG scor- ing framework any bias associated with those factors,” Wilson- Otto says.
If investors do not get the information they need, they can apply pressure through raising their hand to vote against man- age at the AGM. This is a last resort and could be taken as a sign that engagement is failing. It is in a corporate’s best interest to practice high standards of transparency. Just as ask the experienced professional trustee Alan Pickering, who has chaired industry bodies and produced a government-sponsored report on the pensions industry. Dur- ing a panel discussion portfolio institutional hosted on emerg- ing market debt in October, he explained why. “The better gov- erned countries and corporates are the more accessible they are to institutional investors,” he said. So, the greater the level of transparency, the greater potential for attracting capital if needed. Perhaps the change in approach by regulators may prove successful over the long term.
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