Too many investors are focusing on data gaps rather than the information companies are already supplying around their ESG criteria.
This was one of the points raised in the second UK/EU panel discussion at the Global ESG Summit.
For the discussion titled Data and stewardship: Navigating the pitfalls, the ESG investment professionals explored the reliability of ESG data, disclosure and greenwashing. It was hosted by Last Word Media head of research Dylan Emery, and panellists were Hortense Bioy, global director of sustainability research at Morningstar UK and ESG Clarity editorial panellist; Andrew Howard, head of sustainability research at Schroders; Ladislas Smia, head of sustainability research at Mirova; and Gemma Woodward, director of responsible investment at Quilter Cheviot, who also sits on the ESG Clarity editorial panel.
They discussed how as ESG evolves, so too do the ways to measure it and with this there are calls for improved data and disclosures for companies. However, panellists highlighted companies have moved to keep up with the demand for higher ESG credentials and this shouldn’t be a barrier to investment.
“When looking at an assessment, investors should look at the negative impact versus the positive impact,” commented Mirova’s Smia. “But at the moment, there are still too many people still focusing on negative alone.
“The life-cycle approach is often used in qualitative assessments but less so in quantitative, and there’s still some players that’ll argue they don’t have enough data, which is often a challenge faced in our industry. This is the wrong approach. We don’t have to wait for companies to disclose their data as investors. We already have enough information to assess life-cycle approach.
See also: –Baillie Gifford’s Stuart Dunbar: The shortcomings in data approaches to ESG
Schroders’ Howard agreed and said where there is sparse data, engagement with the company should be a priority: “Lack of data is often used as a cop-out. Fundamentally, the issues haven’t gone away, we all deal with lack of data and data gaps, and now it’s just about asking a series of questions, are they important or not?
“Forgetting the data for the time being, but what are the things we want to understand about this company? The next question is what data can we find out to help us answer those questions? Where there’s plentiful data, the process is easier, where information is sparse, we need to use more of our judgement.”
He suggested investors approach an investment from a ‘what are we trying to understand’ angle and then assess how to use the information available to help understand the company’s current stance.
“It is about recognising that not everything will be a data-answer, but rather some things will require judgement. It’s about asking the right questions rather than trying to figure out what data we can find and turning it into a score. Contrary to earlier years, where there was not as much information readily available, now you need to be really specific with what information you use.
See also: – UNCDF’s Preeti Sinha: Avoiding the most dramatic market failure of our time
Sustainable fund ratings
Meanwhile, the panellist also discussed ESG fund ratings, and the sources data is pulled from to compile these, as well as the successes and limitations of ESG data and ratings.
At Morningstar, Bioy explained ratings have evolved to encompass ESG risks relative to other funds. “Morningstar’s methodologies have evolved over recent years, particularly at fund level, and now it’s crucial for investors to understand ESG risk is different from impact,” Bioy said.
“No one single measure can tell you how good/bad a strategy is. You can’t cut corners and you have to look at different metrics – quantitative and qualitative – to get the full picture of what a fund or asset manager does.”
The panellists also shared Schroders and Quilter Cheviot pull data from a variety of sources. Schroders’ Howard said: “Fundamentally, ESG analysis and understanding the implications of social and environmental trends is about asking different questions rather than thinking of it as a specific number that can be plucked out of thin air that can be applied to decision making.”
Quilter Cheviot uses MSCI and Sustainalytics, but with a lot of free, public data available, Woodward said while this can be very informative, it is heavily dependent on how one “processes and interprets the data”. Both panellists from Quilter Cheviot and Schroders would be wary of outsourcing.
However, last year Morningstar published its report The Morningstar ESG Commitment Level: Our first assessment of 100-plus strategies and 40 asset managers, aimed at helping asset managers incorporate ESG into their strategies, but says the challenge actually comes from a lack of data.