Transparent ESG metrics power smarter fund investments 

 

This article first appeared in the Sunday Times on March 12th and is reproduced from Raconteur’s Sustainable Growth & ESG report.

Asset managers must rely on evidenced insights to improve opportunity and risk identification, track ESG metrics, and report accurately to investors and regulators. Yet, many firms still grapple with inconsistent and unreliable data on sustainability.

With more than $120tn worth of assets under management globally, investors have an important role to play in advancing environmental sustainability. Through impact investing, asset managers can encourage the allocation of capital towards improving – and proving – companies’ green credentials and innovation, and play an essential part in tackling climate change.

Fund managers’ efforts, alongside government endeavors, are vital to improve permit systems, incentives and regulations, educational programs to upskill populations on sustainability, and businesses’ changes to standard practice.

Yet there are major hurdles for funds when it comes to directing investments towards achieving sustainability. Most notably, fund managers require a deep understanding of businesses’ ESG performance, with forward-looking insights on potential upsides and risks, while being able to benchmark against the sector.

“The investment industry is under unprecedented pressure to advance sustainability and stop greenwashing, and it needs a much clearer picture to inform its decisions,” explains Jonas Rooze, head of sustainability and climate research at BloombergNEF, a research provider focused on the low 

carbon economy.

Relevance

As expectations rise for funds to transparently deliver on ESG promises to investors, many are finding their own sources of information deeply lacking in nuance, robustness and actionability.

“It’s becoming harder for them to effectively assess the winners and losers of the future, particularly in terms of the effects climate change and sustainable innovations will have on these businesses’ long-term performance,” Rooze warns.

“Much of the data is unreliable and oversimplified, simply looking at carbon emissions and pricing, which is a modelling shortcut.”

Fund managers are constantly pitched newer data-based solutions to these challenges, many of which proffer a singular score summing up all aspects of sustainability. But in reality, one number can never encapsulate the totality of pertinent information, Rooze says. “Fund managers find themselves asking: is this data transparent? Can I really believe in it? Is it relevant? There are a lot of ‘too good to be true’ systems.”

Instead, to be confident that they are making and holding sustainable investments, funds need a view of the much deeper forces at play, and of the likely material impacts of their choices. This means knowing how demand for products and services might shift given different societal trends and environmental conditions. 

It involves understanding where disruptive opportunities could arise or environmental risks emerge – not only for the businesses immediately affected, but for those further down the value chain.

Wide perspective

“This necessitates a view of all sustainability aspects affecting those businesses, and these include their long-term climate change targets, internal and supply chain emissions disclosures, innovations around solar energy, batteries and biofuels, and the shifting regulatory mandates.”
Leading fund managers are already working with Bloomberg to harness these insights, which are fully integrated within the Bloomberg Terminal. Users can access data, analytics, research and news across all asset classes – from corporate stocks and bonds, to municipal bonds and sovereign debt – applying it from initial scoring and filtering, on to management of assets, and up to the end stage of reporting.

As a result, they can swiftly move from a blinkered view of ESG as a risk topic alone, towards a perspective that incorporates the strong potential upsides in long-term growth, efficiency and competitiveness. Armed with these insights – at asset, fund, and sector levels – managers can find opportunities, track performance, spot red flags, adjust holdings, and report as needed.

“Fund managers typically have their own ESG scorecards, and they can slice and dice our data to complete them with accuracy, understanding exactly how they are positioned, what’s changing, and giving them the ability to disclose actions to regulators and clients,” Torres explains. 

“They need to know that every choice is justifiable, effective and explainable.” 

Bloomberg’s data incorporates metrics aligned with all major global standards – including Sustainability Accounting Standards Board (SASB) disclosure standards, and the EU’s Sustainable Finance Disclosure Regulation (SFDR) reporting, which mandates declarations on ‘principal adverse indicators’ covering a broad range of sustainable finance concerns.

Timely, transparent data

On a daily basis, fund managers use Bloomberg’s sustainability data in several core ways – from BloombergNEF insights on the low carbon economy, to standard-aligned indices and metrics. When considering new investments, they assess companies’ current sustainability status and mid-to-long-term potential.

At any relevant point, they can spot changes in the sustainability credentials of their current investments. Whenever they receive requests for information from investors, they can transparently and robustly justify their decisions and explain performance – and at every regulatory stage, they can report confidently on all metrics.

Every part of this journey depends on verifiable accuracy. “Transparency is one of our core principles,” explains Torres. “Fund managers absolutely need to know where their data has come from, so they can confidently take action. As well as being easy to access and interpret, our data can also be quickly interrogated down to its source.”

 “There’s a definite shift from quantity to quality. Fund managers know that as well as simply having the willingness to do better, using reliable tools means they can consistently make the right decisions,” he says.

The growing popularity of these effective insights, and the maturity with which many funds are using them, is seeing asset managers move away from a policy of mass ESG investment, towards a more targeted allocation of capital into credibly sustainable assets, Rooze notes. “There’s a definite shift from quantity to quality. Fund managers know that as well as simply having the willingness to do better, using reliable tools means they can consistently make the right decisions,” he says.

As funds play their important part in global sustainability efforts, Torres hopes there will be a concurrent rise in the determination of individual investors of all wealth levels. “As countries develop ESG skills and capacities, asset owners will powerfully drive transformation, through robust performance indicators and requests for information,” she concludes. “Their demands on these priorities will have game-changing impacts on sustainability.”