Kelly Perry, Director of ESG at Edison Group
ESG investing is now firmly in the mainstream and is here to stay. A recent report by a leading US investment bank found that ESG flows into funds increased 102% year-to-date, with November commitments reaching $47 billion compared with an average of $13 billion in 2019, with many anticipating this trend to continue well into next year.
Similarly, in Europe, rising demand for ESG investments drove managers to change the strategy or investment profile of 253 European funds in 2020, helping to push regional assets invested in ESG funds to a record €1.1tn by the end of December.
However, surveys and reports continue to cite investors’ significant fears over the quality and fragmentation of ESG data and say the issue is at the height of their concerns. Assessment has yet to be standardised, dozens of competing metrics are vying for validation and, as investor education continues to progress, many of the data points conceal as much underlying truth as they reveal.
The majority of the relevant ESG information is only reaching a proportion of large institutional investors, which have the resources and teams needed to analyse such complex data on all the stocks they want to consider. This leaves a number of investor groups, such as family offices, and retail investors, being bypassed.
One way to address the issue of lack of consolidation and consistency, is to push for the standardisation of ESG data. The European commission is doing this with the EU Action Plan on Sustainable Finance, which will impose ESG reporting obligations on European companies from 2021. This initiative has been widely accepted by ESG investors across the board, who say one of the main factors in holding back the development of the industry is a lack of consolidation.
As part of the initiative, the sustainable finance disclosure regulation (SFDR) took effect on the 10th March to ensure fund managers, financial advisers and other regulated firms disclose information on various ESG considerations to potential investors, and on their websites. The resulting framework of regulations aims to streamline the criteria financial market participants use to define, measure and report on the sustainability attributes of economic activities.
In a post Brexit world, it should not be assumed that EU Law will no longer apply in the UK and that the SFDR regulations are insignificant to UK-based financial market participants. In July 2019, the UK Government published the “Green Finance Strategy” which highlighted that they would ‘match the ambition’ of the EU’s action plan and their commitment was reiterated again at the end of 2020. Despite detailed initiatives not yet being disclosed, it is key for those operating in the UK to prepare for such or similar regulations to be implemented across our regulatory framework.
However, standardisation of ESG data does not help fix the issue of this information bypassing groups such as family offices and retail investors. While individual investors are expected to increase their allocation to sustainable investments within the next five years, looking at current ESG data may only lead to more confusion. They are either overwhelmed by the masses of unstructured data, or they are drawn into contradictory ESG scores from third parties that make it even more difficult to decide where to invest.
Further to this is the fact that ESG data isn’t provided to individual investors in an easy to digest format. Investors may also be worried about greenwashing and the extent to which the investment offered to them is sustainable, however aren’t provided with the facts in a way that make it easy to understand. In a recent study of individual pension investors, when ESG integration was explained in an accessible way (through a short animation presentation) two-thirds said they would want some or all of their pension to invest using this approach. So, it is clear that the demand for this type of product among individual investors is there, the information just needs to be explained clearly.
Therefore, it is vital that ESG disclosure and ESG ratings / scores are regulated and standardised so that there is no confusion as to how far an ESG tilt goes on a specific investment. For this to happen there needs to be a drive for further regulation that consolidates data and which provides an easy to reference comparison of ESG based investments for retail investors and institutional investors alike.
As a result, Edison launched a new ESG solution, ‘Edison ESG Edge’ reports, which review companies’ ESG current performance and trajectory across the most significant and stringent criteria. The reports have a standardised structure and a ratified, forward-looking data set of drivers and future performance indicators, which will make assessing ESG performance easier and help democratises investors’ access to ESG insight, allowing them to make more informed investment decisions. As ESG establishes itself firmly in the mainstream, it is crucial that all relevant data makes its way to all interested parties, not least retail investors.
