ESG Feature
is quite low – and this can be confusing,” Kinder says. “They are making improvements but they need to be more transpar- ent with their data so clients can compare or adjust the weightings.”
The problem is that different providers make different conclu- sions about the same company. “One ESG agency might rank Shell as one of the best performing companies out there, while another says that as an oil and gas company it’s hurting com- munities and our environment,” Kinder says. “The impact ele- ment is built into some ratings but not others. “There is a lot of subjectivity in the methodology,” she adds. “So, you can have consistency if you can see the assumptions behind the data.”
And this is the core issue. The data is there, but is it credible? “We have to have confidence as investors in public statements and accounts that are reported,” Burger says. “The reliance on data is becoming more and more evident and so we need quality.
“The growth in ESG data providers has been prolific over the past couple of years, so there is no shortage of information, but there are gaps. As an industry, we have to be conscious of the methodologies data providers use and be aligned with that,” he adds. “And fundamentally, data providers will, maybe not next year but perhaps in future years, start getting increased regulatory attention as more and more capital is directed off the back of third-party ratings.” This is why Newton does not rely solely on third-party ratings. Instead it focuses on the raw data, where it is available and accessible. However, Kinder says that despite there being a long way to go, she is seeing evidence that correlations between different pro- viders are improving and are becoming something akin to credit risk ratings. “For ESG ratings we are seeing correlation co-efficiencies of around 0.5. That is a positive move and is a trend that will con- tinue in 2022,” Kinder says. Perhaps investors do not need companies to disclose their cli- mate exposures. “There is lots of work from some interesting areas of academia on trying to figure out how we could get bet- ter data at the individual asset level,” Mennie says. For example, the Spatial Finance group at Oxford led by Dr Ben Caldecott is using satellite image processing via machine learn- ing to focus on identifying high-emitting locations such as a cement plants. “You could overlay that information with hazard layers, such as it being close to high population centres, to assess the long- term viability of that asset,” he adds. “We hope to see more interesting and creative ways to get data that will enable us as investors to scrutinise and respond to what companies are tell-
ing us and make sure that we have a clear picture about the risks and opportunities of the future.”
Tailwinds Whatever shapes ESG discussions in 2022, asset managers are optimistic. “Regulatory pressures coming out of Europe and the UK, as well as proposed policy changes in the US, are pro- viding a tailwind for ESG and sustainable strategies,” Burger says. “The number of sustainable fund launches over the last couple of years has been significant. “My expectation is that the growth of assets into sustainable strategies globally will be proportionately greater than the number of companies that would be necessarily considered suitable for sustainable funds,” he adds.
The result will be that valuations of corporates will benefit from the rising demand. “Companies will trade above their norms off the back of their ESG credentials,” he adds. But it is not just about backing companies with a strong sus- tainable profile. It will also be about making a difference with your capital. “People considering the impact of their investment beyond financial returns came to the fore in 2021 and we expect that to start being more explicitly considered this year,” Ramscar says. The UN’s Sustainable Development Goals are one way of measuring investment impacts. “We are starting to see their explicit integration in the investment process,” she adds.
Coming of age Many of the opinions expressed through this article are largely on topics we discussed in previous years: data, regulation, diversity and biodiversity. Not much is new. But what is clear is that all the professionals who shared their thoughts with us seem to point to ESG, as a debate, is maturing. Investors, customers, regulators, taxpayers and corporate lead- ers all appear to have a better grasp of the themes and how to manage them, which can only be down to mainstream cover- age, including, despite the main agreement being criticised as not having teeth, events such as COP26.
One point is certain: ESG is here to stay as an institutional investment strategy and we will be following it through the year to see how some of the insights discussed above play out. A final thought on how this debate is maturing comes from BNP Paribas AM’s Kinder.
“There is a departure sometimes between ESG and sustaina- bility,” she says. “People used to equate them as the same thing, but now they are starting to understand that ESG is about whether a company is exposed to grave risks in its sup- ply chain, in the boardroom, etc, which is not the same as sus- tainability. It is an enhancement and there are overlaps with sustainability, but it is not the same thing.”
Issue 109 | December-January 2022 | portfolio institutional | 33
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