The democratisation of ESG data is key to helping funds of all sizes measure their impact

By Kelly Perry, ESG Director at Edison Group

Scrutiny of companies’ ESG credentials across sectors has amplified for a number of reasons over recent years, with focus on the ‘S’ of ESG accelerated by COVID-19 and on the ‘E’ by an increasing global awareness of the need to take urgent action in the face of the climate crisis. As awareness has increased, so too has investment, and this trend is only set to continue; indeed, global ESG assets are on track to exceed $53 trillion by 2025.[1]

However, whilst many firms voluntarily disclose ESG data, this is often unstandardised and is only readily available to a limited number of investors as it is scored through ratings agencies. Nations around the world are making pledges to net-zero targets, and the democratisation of ESG data will be key to ensuring that companies are held accountable to their sustainability initiatives. Further regulation and education will be crucial in enabling a larger proportion of investors, both retail and institutional, to have access to the ESG data of stocks across markets.

New regulation

A lack of standardisation means that companies present their ESG data in a whole host of different ways, and the use of different frameworks means that investors have to put large amounts of resources into establishing their own comparisons between companies. However, many investors simply don’t have this time to spare, whether they be part of a large institutional asset manager or a smaller wealth management organisation. In addition, these investment houses often don’t have access to agency ratings, which imposes significant obstacles to the investment process.

Regulation can ensure that the process of reporting ESG data is simplified and streamlined, removing  some of the challenges that investors currently face when accessing these reports. Countries around the world are already beginning to adopt these measures – a prime example being the introduction of the mandatory SFDR disclosure framework in the EU. Not only do such stipulations ensure transparency about what data is required to be disclosed, but also the metrics by which it is gathered.

Equally, such regulation clarifies social and governance information that is hugely important to help investors of all sizes understand the impact of their wider portfolios outside of environmental concerns. Market-wide frameworks that establish clear criteria and measurement of this data will be crucial to ensuring fund managers are able to make fully informed investments into businesses that are sincerely committed to the wider ESG values they espouse.

Clearer reporting

Standardising ESG data itself is one of many challenges around the democratisation of ESG data for institutional investors. Another element that needs to be addressed is ensuring that the reports themselves are appropriately thorough but also easily digestible. Regulated data will be of little use, even to institutional investors, if it is put into an overcomplicated context that is accessible only through organisations like rating agencies.

Documents that are consistent in format and are comprehensible and comparable across businesses can provide essential information for both retail and institutional investors. This will be crucial to enable investors to make quicker and more informed decisions, and also for signalling the sincerity of a company’s commitment to ESG initiatives.

Recent research has found that greenwashing is the largest concern for investors with an interest in responsible investing, with 44% of respondents worried that ESG investments were not what they claimed to be.[2] Investors across organisations of all sizes need to be able to hold businesses accountable to such data if global efforts to meet sustainability objectives are to be achieved.

New solutions

It is clear that investor relations programmes need to be updated to work hand-in-hand with accessible ESG data. To meet this need, Edison has launched its ‘Edison ESG Edge’ reports. These freely available papers offer a thorough review of a company’s current ESG performance against highly stringent criteria and benchmark them in comparison to their peers. Each report focuses on forward-looking drivers, seeking to establish the business’ ESG future as well as its past.

Resources like these will be key to helping institutional and retail investors navigate the challenges of understanding the impact of their portfolios. Importantly, the reports are written following a standard, readable format to offer analysis of current ESG performance as well as a future outlook to the wider investment community. Data like this can help inform the strategies not only of investors but also the companies themselves.

ESG education

Investment managers for organisations of all sizes need to educate themselves in ESG matters quickly and thoroughly. Often, even institutional funds don’t have the resources to dedicate a team of staff to deciphering masses of unstandardised data. The increased transparency of regulated ESG frameworks can democratise information to ensure that capital is effectively distributed to companies that demonstrate proactive commitments to sustainability.

More importantly, a new approach to ESG reporting can ensure that as much focus is placed on the future intent of a company as on its past performance. Data drives the decision making of institutional funds, but it shouldn’t be the whole story. Benchmarks and regulation to outline forward-looking ESG strategies should have as much weight in assisting fund managers of all sizes to assess their portfolio impact.

Kelly Perry, ESG Director at Edison Group

[1] https://www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum/

[2] https://www.internationalinvestment.net/news/4031730/greenwashing-biggest-concern-44-esg-investors