A look at how ESG is taking hold in different markets, where regulation is coming down on fund managers to deliver what is on the tin, and other issues at work in this advancing sector.
In a region where much of the new wealth is being created, regulators have been using stronger ESG disclosures to attract foreign capital. In 2018, in a bid to increase transparency and investment, the Chinese government made it compulsory for listed companies and bond issuers to disclose their ESG-related risk.
Similarly, as an early booster of ESG in the region, Singapore has seen its capital markets develop faster as a result of a decision in 2016 to mandate sustainability reporting, in the hopes of giving investors more confidence in the quality of ESG data.
If there is a unifying theme in the current ESG narrative, it is around data. In what has been billed as a vast realignment of assets to put economies on more sustainable footings, fund managers admit that the biggest barrier to ESG speeding up this transition is a lack of consistent data across asset classes.
Also curtailing progress is the fact that ESG disclosures are monopolized by a handful of large-cap companies that can too easily skew performance benchmarks, and has stirred debate over the role of big energy companies.
The Wall Street Journal recently called out the ESG conundrum noting that around “eight of the 10 biggest US sustainable funds are invested in oil and gas companies,” the same ones regularly slammed by environmental activists. Environmental funds run by large asset managers aren't going to eschew fossil fuels while they are helping them beat the broader market. BlackRock is an example. Abandoning fossil fuel companies also doesn’t help an orderly low carbon transition, but it does complicate navigating ESG for investors and avoiding greenwashing.
Another challenge is reliant on the industry using more forward-looking rather than historical data to match ESG principles to impact performance. Carbon emissions are one example of where reporting is nowhere near consistent across companies or industries for providing reliable data to feed into performance. The landscape is littered with uneven disclosures.
Most managers agree that they could improve their overall offerings to investors if they could provide ESG performance impact on top of financial performance. That said, Deloitte found that less than half currently even share ESG data with their institutional clients and less than a third do so with retail clients, suggesting that there is a gap between sentiment and reality.
There is evidence that the information gap is closing. A recent Financial Times survey of some of the world's leading asset managers found that the number of people firms are hiring into stewardship roles almost doubled between 2017 and 2020. While not at the sharp end of analytics, these roles help drive board discussions on environmental disclosures and have a bearing on voting at annual meetings. The FT's research of around 30 large asset houses found that BlackRock’s stewardship team had risen most by around 80 per cent over the past three years, with Vanguard up by 75 per cent in second; and State Street Global Advisors third. Those recruiting in the space see demands from large pensions funds predominantly driving trends.
Developing better analytics at larger institutions has been evident in more M&A activity as big firms snap up stakes in leading data and risk providers.
Within that space, more tools are being developed to track company activity, which really is where the ESG journey begins. AI engines are being used to scan more unstructured data for ESG risk, whether a company has chosen to report such risk or not. Running AI searches on patent filings, for example, to spot companies closing in on new low-carbon technologies is one way firms can get a jump on advanced screening techniques. MSCI estimates that only 35 per cent of the data used to compile company ESG ratings comes from voluntary company disclosures. Satellite data is another in wider use to help risk assessment, especially in extraction industries most under threat. Applying technology to vet companies and investments in some ways knows no bound. The two-hander will be marrying the tools with strong reporting regulations.
Where money managers see the next growth phase in ESG is in product customization, according to Deloitte; progress here should help investors separate basic ESG from more impact driven allocations, although these are very much early days.