Asset managers need to make a conscious effort to improve their data to ensure transparency within the ESG investment industry – and collaborate with the peers, according to the co-founder and COO of carbon management platform Greenly Earth, Matthieu Vegreville.
Here, he answers ESG Clarity‘s questions on exactly how firms can go about this, and the benefits that will be seen.
Collaboration has been highlighted by many asset management CEOs as key to pushing forward with the transition to a sustainable economy. But what are the barriers to this collaboration?
You know how they say you can’t love someone else before you love yourself? Well, collaboration requires the same self-awareness and improvement for collaboration to create an improved and functional future for a more sustainable economy.
Just like a good relationship cannot come to fruition if two people aren’t whole by themselves, a good business collaboration cannot yield a more sustainable economy if both businesses have not developed their own strategic models personalised for individual success.
The problem is that the majority of asset managers solely rely on typical metrics provided by industry averages, when each individual company should strive to measure and evaluate their own personal data so that they can adjust their environmental habits and impact to climate change accordingly.
This has been made known by Mark Carney, who now serves as a finance advisor to the UK prime Minister Boris Johnson. In his infamous Tragedy of Horizons speech, he delineated how it is impossible to finance this energy transition without calculating each individual company’s emissions – and that long-term investments are imperative to reducing greenhouse gas emissions.
However, only 20% of global emissions are accounted for, so if asset managers really are serious about transitioning to a more sustainable economy, the bottom line is – they need to take a closer look at their investments.
Where are some good examples of collaboration?
Some examples of collaboration include regulators where they have tried to standardise carbon reporting, such as Sustainable Finance Disclosure Regulation (SFDR) in Europe and regulations proposed by the Securities and Exchange Commission (SEC) proposed regulations in the US.
The SEC serves as an example of trying to unify the fight against climate change and cultivate collective environmental success, as they recently proposed a potential regulation that would demand all public companies to keep a meticulous track of their business endeavours that impact climate change, carbon or greenhouse gas emissions, and plans to transition net zero. These public companies would be required to produce these detailed records for public entities if asked.
While making an effort to require ESG reporting and disclosing ESG data is a probable method to initiate industry wide collaboration, this tactic cannot always yield success as most firms are owned by more than one asset manager.
So, while it is viable to believe that making ESG data public knowledge can help asset managers to recognise the most sustainable investment opportunities – there’s another way to unify this environmental mission and promote collaboration, which is to require various standards before laws have the chance to come into effect.
Therefore, another example of collaboration is to make these requirements before laws come into force. This has been demonstrated with France Invest, a private equity association in France – where asset managers share their emissions and ESG practices voluntarily prior to any formal regulations being passed.
How can the industry improve ESG transparency?
There are a multitude of ways that companies can improve their ESG transparency. For example, the industry should mandate standardisation in carbon accounting. This requirement should conform and be ready to rapidly adjust alongside any new GHG protocols, PCAF, or GRI standards.
Standardisations are made so that each company can be fairly evaluated separate to any potential preconceived notions or valuables that could alter the way a company’s ESG transparency or data is viewed to other companies.
However, it is important to note that much of the responsibility to improve ESG transparency is contingent on the managers of each individual company themselves. Managers must have the incentive to kickstart their own projects and strive to be more transparent about which emissions they choose to invest in.
If companies and managers are more honest about their investments, it will become increasingly difficult for other companies to insinuate allegations – like greenwashing. This is precisely how we jump start the need for ESG transparency throughout the entire industry.
If everyone is more honest about their investments, then transparency becomes the new norm – and will essentially, “force” all companies to willingly provide their ESG data and ultimately encourage trustworthy collaboration.
What is your outlook for ESG investing as a whole? How will it look in five years’ time?
Within the next five years, it isn’t illogical to expect ESG investing to become more common given the continued outlook on environmental concern around the globe.
Measures implemented on one continent could inevitably impact another. For instance, SFDR – is a strategy proposed to make investments more sustainable that will directly impact the US market, despite the fact US companies are obviously not obliged to comply with this regulation set forth by the EU.
Regulations like SFDR have the potential to improve ESG transparency in the industry as it will influence US markets to do the same.
For example, just within Europe – 70% of investments were going into investment funds that were perceived to be sustainable when they really weren’t. Therefore, a regulation like SFDR was necessary in order to define what truly qualifies as a sustainable investment fund.
The need to concretely define sustainable investment funds is making its way into the US market, too. One of the biggest examples in the US are university endowment funds or pension funds. Americans shouldn’t contribute to these types of investments at all if they threaten the planet, but on the other hand – it’s still necessary to invest for things like education and retirement.
The most viable solution is that 100% of funds should be committed to measuring their investment emissions. This way, no one partakes in an unethical investment, and companies can continue to illustrate their ESG transparency to the rest of the market. There is no reason why investment funds cannot make this transition, as the process to measure investment emissions has become affordable with the newfound use of green technology.
All in all, collaboration is key to overall business success, but prioritising ESG transparency is the most pivotal measure a company can strive to manage as the climate crisis continues.