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The rise of sustainability as a concept in investing may be facing some teething issues - namely a surfeit of data sources and lack of standardisation - but change is on the way.
Consolidation is taking place among the data providers supplying ESG data to fund houses and institutional investors alike. In April Morningstar announced it would acquire the 60% in Sustainalytics it didn’t own, while S&P Global bought the ESG rating business of RobecoSAM in January. The number of ESG data providers is likely to quickly coalesce down to a more manageable number.
"There will be more demands for a standardised approach, so you have more comparability and research, to make it useful for readers and users,” said Pat Woo, a partner for business reporting and sustainability in Hong Kong at KPMG. “That won’t take 10 years; it’s likely to be more like five.”
A few more years offers another advantage too: more data. “Over the next five to ten years there will be more and better data available, and more of consensus around what’s really important and what is less so,” said Jens Peers, chief investment officer for European fund manager Mirova.
Jens Peers, Mirova
The coming few years should also see international governments and agencies finalise a core set of ESG metrics, likely based around the United Nations’ Sustainable Development Goals.
UNREMARKABLE AND ESSENTIAL
By 2030 it is likely that core ESG metrics are standardised, universally recognised and adopted.
Accredited auditors like KPMG will most likely audit company filings and accredit them, much as they do with financial balance sheets today. Financial institutions and investors would then decide how much these metrics affect the financial outlook and risk of each entity.
In other words, by 2030 ESG scrutiny will become a universal but unremarkable part of risk management across all mainstream financing and investing.
In a decade’s time we shouldn’t talk about it,” said AIA’s head of investment solutions, Trevor Persaud. “It shouldn’t be remarkable at all. What will become marginal are non-green financing and funding sources.”
Trevor Persaud, AIA
Indeed, at that point investment products looking to colour themselves as particularly ‘climate-focused’ or ‘socially responsible’ would need to dive deeper into the impact of company approaches. That could lead to the mainstreaming of approaches such as impact investing.
Another likely shift is a heavier focus on each individual area of E, S and G, with asset owners opting to dig deeper into each area.
“We are pulling the perimeters out and working out what E and S and G mean,” said Michael Frith, chief economist for New Zealand Super. “We may not want to be in all three to the same degree.”
The NZ$41 billion ($26.27 billion) sovereign wealth fund has done a lot of work in the ‘E’ space, cutting the carbon emission intensity of its portfolio by 20% between 2017 and 2019, but Frith said there is more it believes it can do, particularly by 2030.
“Our strategy is first to down-weight and then exclude carbon emissions. Next it is to find actual investments reflect society’s demand for alternative energy or a lower carbon world. So, in the coming 10 years you will see us make more investments in that space.”
Asset owners will also pressurise alternative asset providers to encompass ESG into their investment and management perimeters. Doing so could mean quick and meaningful results; it’s a lot easier to conduct direct change when you’re the owner of an asset.
However, this will also mean the general partners need to disclose more information around the ESG progress of their investments.
KPMG’s Woo admitted GPs face relatively little pressure today to adopt ESG across their businesses. But he believes it’s just a matter of time.
“You’re talking about a pincer movement between LPs, asset owners and institutional investors pushing on one side and regulation on the other side, both squeezing the alternatives market into making those moves.”
LICENCE TO OPERATE
ESG has arrived, and it is here to stay. The metrics appear to offer distinct advantages and they are being incorporated and standardised by regulators and financial institutions alike. Asset owners will either help lead the process or have to follow.
“If individuals prefer pensions that are reflective of a pro-social and pro-environmental society, they will vote with their feet if the practices of asset owners don’t do something in those area,” said Roger Urwin, co-founder of the Thinking Ahead Institute. “The phrase that comes to mind is a licence to operate.”
ESG may often be pictured as a fresh green plant, but it is set to have very deep and widespread roots across the world's investment industry.
This story was adapted from a feature on ESG that originally appeared in AsianInvestor's 20th anniversary edition, published in late June.
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