ESG Feature
investing in long-term assets, which is where the sustainability challenges are most relevant. “There are some quite deep-seated and fundamental structural problems in that market which will start to be resolved next year. It is a multi-year journey, but they will come much more to the fore in 2022.”
DC schemes investing through platforms, which are struc- tured around daily liquidity, is one issue. Then there is the charge cap, which Manuel dismisses as a “red herring”. “It is a market which is exceptionally cost conscious, where fees are everything,” he says. “Almost all decision-making is done with fees being the dominant factor, which puts a con- straint on what can be done.” Another problem in the DC world is the conflict of issues. The drive for flexibility and choice is a good objective in isolation but it is incompatible with putting capital to work long term in the real economy. “You cannot give people the option to change their investments with a day’s notice, whilst at the same time asking them to commit to long-term projects which require capital to be tied up,” Manuel says. “So, there is a fundamental tension in that market which is not being discussed.”
The Americans are coming
The US could alter the landscape for ESG-led investors in 2022, Manuel believes. “The US is changing. Across the board it is waking up to responsible investment and on the demand side it is changing the picture dramatically.
“In the global marketplace, the UK and Europe are the minor- ity customer base,” he adds. “If we see higher demand from the US, it will make a big difference to the availability of prod- ucts in the market and the innovation driving those products.” Amundi’s Guignard also predicts further penetration in this market. “Following recent growth, ESG adoption is now advanced in the institutional market, especially Europe. How- ever, we believe that we are far from reaching a tipping point on ESG adoption, with growing interest from institutional investors in the US and Asia.” For US institutional investors to turn more bullish on ESG, a significant hurdle will have to be overcome. A report by com- munication agency Edelman concluded that most institutional investors across the Atlantic do not trust ESG as it is reported and measured. “We need to fully align investors and societal expectations if ESG is going to maintain momentum,” Mulligan says. “The investment community needs to establish trust in the ESG par- adigm change if it is going to deliver in terms of climate and sustainable development.”
32 | portfolio institutional | December-January 2022 | issue 109 Magic numbers
Data is one of biggest challenges for sustainable investors, and Manuel does not expect to see this change in the coming 12 months. “There are lots are people trying to improve it, but ESG represents many issues, which are different in nature. “Perhaps we will see data improve in those underlying themes but getting to a place where there is perfect ESG data covering all situations and across all asset classes does not feel like a realistic outcome to me,” he adds. Some are optimistic that, although far from perfect, the quality of the underlying data is moving in the right direction. “The lack of consistency and quality of ESG data remains a concern for clients, but it
is improving,” Ramscar says.
“Increased regulation has led to greater transparency and more mandatory disclosures, but the lack of market-wide consistency can be challenging. “There will hopefully be more guidance and regulation to sur- face, presented in a more consistent manner,” she adds. For Mulligan, the question he has about data is: “This is the data I have, but is it the data I need?” He believes that ESG disclosures are too focused on the devel-
People are starting to understand the S and the G a lot more. Caroline Ramscar, LGIM
oped world and wants global information, which will only hap- pen when emerging markets are brought into it. “The danger is that we will concentrate on what we can measure immediately, not what we need to measure going forward,” he says. But for some, how the data is measured is another problem. Arriving at one number to represent aggregate risk across three pillars and 10s of constituent metrics for one company is potentially meaningless. “It does not tell you much about a company in terms of its ESG risk,” Kinder says. “An average might obscure some important risks that a company is not managing, while it could be performing well in other areas.” BNP Paribas AM now sets its own ESG scores in response to some third-party rating providers having “a black box when it comes to the numbers they churn out”, Kinder says. Setting their own scores gives BNP Paribas AM more control in collating the metrics to understand the data and its red flags. The move also expands the coverage to include emerging mar- ket countries, which can have the furthest to go in terms of managing environmental and social issues. Standardisation between ESG data providers will be a big theme in 2022. “Given that they are influential for the alloca- tion of a lot of capital, the correlation between the big providers
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