ESG Data: The Case for Transparency
Joao Sousa Dias, Sales Director
It seems there is nothing hotter in investing today than ESG. While long considered a “tick box” activity, environmental, social, and governance factors have taken centre stage in recent years amid pressure to address issues such as climate change and diversity, as well as societal changes spurred by generational transition. Among investors, though, the catalyst with the biggest impact is the mounting evidence that accounting for ESG factors can improve returns.
“Incorporating ESG analysis into the investment process can add between 50 and 100 basis points per annum to returns,”Arabesque’s Andreas Feiner quantified in an interview with Eagle, adding that it: “imparts a slight reduction in the overall risk”. The numbers support the narrative that impact investors have been making for years. Companies with high ESG standards are likely to be better run, more resilient to changes in regulation, and less susceptible to being fined or suffering reputational issues over the long-term.
That’s the good news for investors. And it helps explain gravitation to socially-responsible investment strategies, as some €19.2 trillion is committed to sustainable strategies worldwide, according to the Global Sustainable Investment Alliance. Europe leads the way in this, accounting for well over half (57%) of professionally invested funds employing sustainable strategies globally. The bad news, however, is that ESG can be a labour-intensive pursuit for firms that don’t have their “data house” in order.
According to the consulting firm Opimas,total spending on ESG data will increase by around 48% in the next two years. Asset managers and asset owners alike are looking to incorporate ESG data to drive both investment decision-making and investment analysis. Furthermore, while ESG factors have traditionally been the preserve of equities, increasingly ESG-based fixed-income indices are emerging. As a result, the demand for ESG data has never been higher and will only continue to grow.
Meeting this demand is easier said than done, however. The availability of data is scarce with vendors playing catch-up as ESG strategies multiply. To fill this void, a range of heterogeneous ESG data services have been introduced, yet standardisation—and, more importantly, standards—have yet to materialise.
This is no great surprise, since the regulatory environment is still developing and ESG measurement is still in its infancy. As Andreas Feiner points out, in the last two years regulators have introduced nearly 300 different rules focused on sustainability and corporate governance. While this is likely to improve ESG reporting—and provide greater opportunity for investment decision makers to identify metrics that deliver outperformance in the longer-term—in the short-term, it holds back standardisation.