The global pandemic accelerated the focus on ESG considerations and according to Bloomberg, ESG assets under management could reach more than a third of the projected USD 140.5 trillion global total by 2025.
This acceleration brings a series of challenges for asset managers, including navigating the raft of new regulation, the shifting nature of societal expectations around the definitions of ESG and the monumental challenge of the net zero transition given the triple energy challenge of security, affordability, and climate change, all brought into stark focus by the war in Ukraine.
Arguably, data quality is one of the biggest challenges but also a critical tool in addressing these challenges given, according to Bloomberg, one in every three dollars invested will be influenced by ESG data in some way.
As this dependency increases, then bluntly, if the data is not right, neither are the outcomes. As a result, we are rightly seeing increased scrutiny of that data, as well as regulation to help drive better data, such as mandating climate-related disclosure by companies, the recent EU consultation on ESG ratings and the introduction of the EU taxonomy to bring the definition of what is green into sharper focus.
Consistent data are vital, but so too is meaningful interpretation and reporting. ESG ratings conspicuously vary in how they construct assessments on company policies, management systems and disclosures. Comparable quantitative data remains limited and the shift in emphasis from ESG risks to the company to the impact of the company means there is both an urgent need to fully understand and assess the available data and to develop more appropriate indicators.
The EU’s SFDR regulation represents a robust move towards imposing disclosure obligations of so-called ‘principal adverse impact indicators’, which aim to focus on impact of the companies held in portfolios.
For us to be truly effective as an industry, it is imperative that we scrutinise and evolve appropriate data and metrics to inform our investment decisions, while communicating clearly and effectively so clients understand the impact of their investments on our future environment and society.