This article was originally published in Raconteur’s Sustainable Investing report in The Sunday Times.
Investors are placing vast sums of money into products they view as having strong environmental, social and governance credentials, but problems remain around data accessibility and quality. More consistency, reliability and transparency is urgently needed.
Environmentally and socially conscious stocks or bonds have been touted as delivering positives for the planet while growing wealth for investors. But only more recently, with $38 trillion of environmental, social and governance (ESG) assets under management in 2020 – estimated by Bloomberg to grow to $53 trillion within five years – has sustainable investing gone genuinely mainstream.
While investments have soared, serious concerns have hampered trust in the market. Perhaps the most obvious problem is greenwashing, through sometimes highly misleading corporate environmental claims. Another concern is the relative lack of pertinent, comparable information. Investors have been beset by disparate corporate reporting practices, as well as by market research reports based on estimates and industry averages.
Investors are increasingly demanding the financial industry focuses on sustainability initiatives that support better long-term, risk-adjusted portfolios,” says Patricia Torres, Global Head of Sustainable Finance solutions at Bloomberg. “The lack of good data makes it hard for fund managers to explain why they have taken certain decisions from an ESG perspective and it leads to investor criticism.”
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The rate of growth of ESG markets presents its own challenges too and can result in marketing promises outpacing impact realities. While investors initially simply blocked their money going to companies deriving too much of their profits from fossil fuels, for example, they soon moved on to demand much more specific ESG ratings as a basis for investment choices.
“At this point in ESG’s evolution, the rush for data often uncovered massive inconsistencies, inaccuracies and even misleading claims,” says Torres. “Investment managers suddenly faced questions about whether their ESG strategies were really as positive as promised.”
The gap between investor expectations and the promises made by corporations and institutional investment funds is in the sights of market regulators. Several rule-makers are now seeking to establish clear standards around definitions, metrics and disclosure.
Leading the way is the European Union, which has incorporated recommendations from the Task Force on Climate-Related Financial
Disclosures (TCFD), proposing clear taxonomy for classifying sustainable operations, regular disclosure by investment firms on how ESG fits their strategies, consistent metrics and governance, and benchmarks to help investors track their portfolios.
“The first focus has been on directing capital to more sustainable outcomes that meet countries’ climate pledges, rather than simply comparing companies against each other,” says Nadia Humphreys, Business Manager for Sustainable Finance at Bloomberg. “Equally, regulators want to ensure institutional investors appropriately assess the systemic risk from climate change.”
To succeed consistently on ESG reporting and monitoring, European funds need to work towards a complete understanding of activities within their portfolios, a change that can be driven by regulators in combination with corporations and the investment industry, Humphreys argues. “A core aim of the European regime has been to introduce a holistic understanding of all issues, rather than a narrow focus that might assess carbon but ignore waste management or biodiversity,” she explains. “This is the only way to truly measure impact.”
Bloomberg applies established methodologies for extracting and displaying transparent market information to metrics, indices and analysis on ESG factors.
The result is a range of reliable information available on its widely used terminals, presented in actionable formats tied to investment
fundamentals. All the content can be integrated into regular risk and modelling systems. Meanwhile, Bloomberg analytics correlate ESG and investment data, and deliver robust, clear insights that inform smart strategies.
“We have entire teams completely focused on accessing, curating and presenting accurate ESG data for a given company,” says Torres. In a field largely reliant on industry averages and algorithms, and on digesting obscure text in company reports, Bloomberg differentiates by combining cutting-edge machine learning with the expertise of hundreds of data-quality staff.
As ESG investments continue to scale, Torres expects particularly notable growth in sustainable bonds and loans. Indeed, Bloomberg calculates that last year saw a record $732 billion of sustainable debt issuance, boosted as governments sought to raise money for economic stimulus during the coronavirus pandemic. Companies too are tapping the markets to fund initiatives such as greenhouse-gas emission reductions or biodiversity conservation, with a notable number linking funding to clear ESG targets.
With the more than 40% growth in ESG investment expected in the next five years, asset managers, pension funds and others will face ever-stronger expectations from both investors and regulators. Fund success depends on rapidly securing access to accurate information that is highly comparable, fully consistent and quickly actionable.
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