How can access to more accurate and standardised ESG data, improved disclosure and higher quality and more consistent corporate reporting help to increase sustainable investment?
- Investors need accurate data and better ways to measure to build sustainability into their workflow.
- The majority of asset owners state the lack of standardisation in ESG data, scores and ratings is most common barrier to increased adoption of sustainable investment.
- ESG data, better disclosure and higher standards of corporate reporting will play a crucial role in helping move the financial industry forward.
The sustainable investment revolution is picking up speed.
Issues such as climate change, environmental pollution, biodiversity, human rights, business ethics and corporate governance are now at the forefront of public attention.
More and more investors have signed up to global initiatives, such as the United Nations’ Principles for Responsible Investment (UN PRI), to help cause change in these areas.
However, there’s a stumbling block: inconsistent, low-quality and patchy data. Investors need better data and better ways to measure it in order to build sustainability into their funds and investment products.
What’s wrong with the data?
There’s been a decade-long push to improve standards of environmental, social, and governance-related (ESG) metrics and disclosure across the corporate sector.
In 2015, the G20 Financial Stability Board (FSB) set up an industry-led task force on climate-related financial disclosures (TCFD) to design a better transparency framework.
Its goal, set out in 2017 with the publication of TCFD’s recommendations, was to enable financial market participants to understand better their climate-related risks.
In October 2021 the TCFD issued further guidance on disclosures of climate-related metrics, using FTSE Russell’s carbon targets framework as an example of transparency on corporate greenhouse gas emissions reduction targets.
Recent European Union initiatives – such as the 2016 Benchmark Regulation, the 2020 Taxonomy Regulation and the 2021 Sustainable Finance Disclosure Regulation – all show the growing commitment of policymakers in the area of sustainability.
But ensuring that extra-financial disclosures catch up with mandatory financial reporting is a tough challenge. And it’s one where the industry is still falling short, according to many observers.
“Gaps in ESG metrics continue to make it difficult for investors to compare the sustainability performance of different companies,” say David Harris, Global Head of Sustainable Finance, London Stock Exchange Group, and Arne Staal, CEO, FTSE Russell.
Poor data a barrier to sustainable investment
According to the 2021 FTSE Russell asset owner survey, which researched almost 200 global asset owners, the lack of standardisation in ESG data, scores and ratings is the most commonly cited barrier to the increased adoption of sustainable investment, with 59 percent of survey respondents stating this as their primary concern.
Almost half (45 percent) of survey respondents expressed concern about the quality or consistency of corporate reporting and disclosures, while 42 percent are concerned about the availability of ESG data and the use of estimated data.
Perceived barriers to sustainable investment adoption
Doubts over data standards help fuel allegations of ‘greenwashing’ – cheating on sustainability –at companies and investment product providers.
The need for transparency and objectivity
Transparency is a necessary first step in ensuring that sustainability/ESG data is fit for purpose.
It is critical in driving accurate investor information, public discourse and regulatory guidance. Transparency also helps to achieve positive outcomes both within finance and across society.
The investment solutions businesses of the London Stock Exchange Group (LSEG), FTSE Russell and Refinitiv, collect and use data that is publicly disclosed. This means it is possible to audit the data all the way from public documents (such as annual reports) to the resulting company scores and fund ratings.
In addition, sustainability data should be measured as objectively as possible, which is not an easy task. Early ESG databases tended to focus on companies’ operations, rather than their products, services or supply chains.
It’s hard to expect companies to be able to report on the broader social and environmental impact of their products and services in as objective and measurable way as they report on their own activities, but this is a goal capital market participants need to set themselves.
The EU’s new Taxonomy for sustainable activities, which requires companies to report on the proportion of revenues, and operational and capital expenditures that are ‘green’, is likely to be an important first step in ensuring the comparability of corporate sustainability data.
FTSE Russell’s Green Revenues data model and Classification System, launched in 2015, offered an early example of how to do this: it goes beyond the traditional focus on how a company operates and measures that company’s green revenues in terms of products and services.
There’s increasing societal pressure to arrive at better standards in this area. For example, over two-thirds of the asset owners who participated in the annual FTSE Russell survey say that climate and carbon are their priority focus area when seeking to invest sustainably.
Sustainability issues of priority focus
But compare that demand with the current state of affairs, where only half of the companies in Refinitiv’s ESG database currently report on CO2 emissions. As a result, Refinitiv has developed sophisticated carbon models based on a transparent methodology.
These provide clients with an estimated carbon emissions value when a reported value is not available.
Better sustainability data opens the door for asset managers and asset owners to employ a range of new applications to mitigate risk and generate performance.
For example, MarketPsych ESG Analytics extract complex meaning from the text of millions of articles and social media posts. This is summarised into a single score, offering a near-real time measurement of a company’s or country’s sustainability.
Two-way communication on sustainability
Improved information flows between asset owners and investee companies could also help reinforce the trend towards sustainable investing.
Asset owners and asset managers may wish to tell companies which metrics they prioritise and wish to assess, while corporations can play their own role in ensuring the supply of transparent, accurate and comparable sustainability/ESG data for the financial industry.
Refinitiv’s ESG Contributor Tool allows corporate managers to review, update and publish their firms’ ESG data within the Refinitiv ecosystem. Almost 1,000 contributors have accessed the tool.
This ensures data users have access to the timeliest data on individual companies, as well as allowing those supplying information to check its quality and comparability.
Paths towards sustainable investment
As world leaders gathered in Glasgow for the 26th United Nations conference on climate change, there’s increasing pressure on politicians, business leaders and policymakers to follow scientists in setting out a path towards more sustainable development.
Many factors will play a role in determining the success of this important and long-awaited event. But improved ESG data, better disclosure and higher standards of corporate reporting will play a crucial role in helping move things forward.
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