Sustainable investors used to a famine in ESG data are now experiencing something of a feast, but they risk being overfed.
According to Rachel Whittaker, head of SI at Robeco, “huge strides” forward in the availability of information from companies on their contribution to and risk from environmental, social and governance factors, have “undoubtedly lead to better informed decisions”.
But she adds: “We are overwhelmed with data, and regulation will likely drive an avalanche of additional company reporting in the next few years. Too much data could even create new challenges, making it more difficult for investors to identify the most important indicators amid all the noise.”
Research of 25 fund board professionals published by the First Sentier MUFG Sustainable Investment Institute this October finds some respondents “have not yet have developed an appropriate knowledge and understanding of key sustainable investing regulations, investment approaches, tools and metrics involved”.
For example, under a third of interviewees rated the knowledge of the boards that they serve on as ‘high’; a level of knowledge generally observed by them in professionals more actively involved in product or investment processes.
The Institute argues that the issues relating to sustainability and sustainable investing are “complex and require deep analysis to break down the contributing factors”, and that greater standardisation in regulations, definitions data sets would be of benefit to investors.
The Institute highlights the success of regulations such as Europe’s Sustainable Financial Disclosure Regulation (SFDR) which imposes classification requirements on any funds marketed as ESG. It also pointed to the importance of harmonising company reporting under the Taskforce for Climate-related Disclosures (TCFD) which are not mandatory for larger organisations in the UK, Japan and New Zealand.
“Apart from advancing local requirements, international harmonisation, where possible and practical, was also pointed out as beneficial. This includes standards such as the SFDR and the EU Taxonomy, as well as those being developed at international level, such as by the International Sustainability Standards Board and TCFD,” the institute states.
No magic bullet
However, Whittaker rejects the notion that standardisation is a ‘magic bullet’ for investors attempting to process ESG data, and argues that attempting to treat sustainable data in the same way as financial information is flawed.
“Standardised data is far from a magic bullet. Critics point to global accounting standards, stock exchange listing rules, regulatory requirements for financial statements to be audited, and severe penalties for accounting fraud as reasons why financial data is superior to non-financial E and S data. However, financial data is not perfect either,” Whittaker says. “There are enough examples of accounting fraud to know that if companies want to hide information, they will, and many get away with it. We only hear about the cases that are discovered.”
Instead, Whittaker says “standardised accounts do not present the whole picture”, and instead calls on sustainable investors to go beyond looking at an historic picture of a company’s contribution to vulnerability from ESG risks, to understand future mitigation efforts.
“Backward-looking metrics only give us a starting point, and more research is needed to predict the future. This is the job of investment analysts, and it is an art, not a science.”
This leads Whittaker to conclude that ESG investors are forever bound to a world that delivers “messy”, incomplete and contradictory accounts, and those professionals most able to navigate such an environment will have an advantage over those who “sit and wait for data to become perfect”.
She says: “We must not lose sight of the aim of sustainable investing – to channel capital into sustainable economic activities, by investing in sustainable companies that will deliver financial returns and have a positive impact on the world. The collection of data is not the end goal, and the pursuit of perfect data must not be an excuse for inaction.”
