How Investors Are Currently Using ESG Decision-Making Data to Guide Their Investment Strategy
Sound investment decisions are driven by sound data – and ESG considerations are no different.
In the same way that investors use traditional financial data to evaluate business performance, ESG decision making uses data to evaluate the sustainability, social or governance contexts of investments, be that an asset, facility, company or region – past, present or forecasted.
That could pertain to environmental matters like annual carbon emissions, or through a more social lens to issues like workforce diversity and human rights. Data on governance factors, meanwhile, might cover issues like corruption or the gender composition of a board.
This data can impact various stages of the investment process, from asset allocation and security selection, to portfolio construction and risk management.
But a key issue with all of this data is availability.
Because ESG data relies on public disclosure by corporates – which isn’t always consistent or forthcoming – it becomes a near-impossible task for non-specialists to establish a view of the investment landscape that is transparent enough to drive decisions.
That challenge is compounded by the nature of ESG data, which tends towards the more abstract and qualitative when compared to the traditional metrics by which financial performance is evaluated. That type of data can be much harder to gather and research, as non-financial considerations are often gleaned from narrative and context, rather than metrics.
All this has resulted in many investors using the services of ratings providers such as MSCI and Sustainalytics, who provide ESG research, ratings and data to institutional investors and companies.
The trouble is, this blanket, one-size-fits-all approach often misses the nuance that reveals the true context around an issue or factor.
Take the automotive industry. Ostensibly, the rise of electric vehicles is having a hugely beneficial impact on the environment. But from another standpoint, the industry has yet to resolve battery recycling issues and there is a widespread fightback against unionization from leadership.
ESG ratings providers can miss the detail that exposes a broader truth.
The alternative to ratings providers is investors manually researching companies to find data on ESG practices themselves.
The key issue here is the time that process takes for researchers. (Hint: It’s a lot).
