The pressing need for ESG reporting to be standardised

With more and more inflows finding their way into ESG strategies, the need for greater standardisation has grown to help investors analyse and compare funds. Our panellists consider how ESG reporting is evolving and what data is most useful.

As investor awareness of ESG issues continues to grow, asset managers see greater inflows into such strategies. However, it is also fuelling demand from clients for greater standardisation of ESG reporting to help them make informed allocation decisions and compare products.

One of the reasons that greater standardisation has not been possible in the ESG space has been the sheer amount of data that is now available and the growing number of data providers now active in the industry, all with different processes and offerings.

Divergence is an issue for ESG investors, admitted University of North Carolina at Wilmington’s Stephen Horan, a former managing director at CFA Institute.

“There’s a consensus that there’s really no consensus on how to integrate ESG,” he said. “It’s not surprising that one would see divergence. Increasingly, these ESG issues are being defined as factors that affect the long-term value of a company, and people are reserving socially responsible investing and corporate social responsibility for factors with non-economic or non-financial impact.”

Often different data providers will have different views on a company’s outlook and performance under various criteria, making like-for-like comparisons between data providers challenging. Such divergence can result from data discrepancies, benchmark choice, data imputation, information overload, or weighting schemes.

However, Horan said he was more sanguine about ESG ratings divergence, arguing that markets were already pricing in issues like climate change.

“Just as fundamental investing reflects a heterogeneous set of judgments about value, [so] ESG reflects a heterogeneous set of values and beliefs among investors,” he said.

“I’m not optimistic that we would coalesce around a single set of ESG rankings or scores, nor would I want that. That said, the vast majority of investment professionals think that we will have disclosure standards in five years.”

Having recently launched an ESG-themed fund range, Invesco multi-asset portfolio manager Clive Emery said he had been “dismayed” by the variability and variety of reporting and processes for ESG products. He added that many products could be best described as “‘we invest sustainably’ and a very pretty picture”.

“This led to me thinking about what the client needs,” he said, “and reverse engineering… from these thousands of data points to ask what the client actually wants to know when they’re investing.”

As such, Emery decided to concentrate on “the three Rs” – the return profile of a fund, the risk profile of a fund, and the responsibility of a fund – for both institutional and retail clients.

“What they [clients] want to know is how are you going to approach those components, what is the process that you are going to try to deliver, and what is the outcome,” he explained.

However, benchmarking against peers remained challenging, with Emery highlighting the lack of standardisation for reporting and the vast amount of data.

“When a client looks at an investment product, you will look at the return of a fund over one month, three months, one year, five years; it’s consistent, it’s regulated,” he said. “You might look at the risk [profile] of the fund – the volatility, the drawdown – but you’re looking at a couple of metrics.

“I’m just not sure that clients have the means to look through 30 pages of ESG data to justify the credibility of the responses.”

Emery added that Invesco had recently agreed to fund academic research investigating the standardisation of ESG data reporting to understand the benefits and provide a starting point for new solutions.

For now, however, investors and asset managers will have to put greater effort into understanding their existing data providers and the services they offer, according to Elroy Dimson, chairman of the Centre for Endowment Asset Management at Cambridge University’s Judge Business School.

“In the back of my mind, what I think about is the phrase people sometimes use: ‘if you treasure it, measure it’. And if you don’t measure it, then it’s really rather tough to know how you’re doing,” said Dimson. “The choice of provider is crucial; a rating service will lead you in a particular direction, and you need to understand what service you buy.”

The above article was drawn from ‘Just how green is a portfolio? The challenges of and need for standardisation in ESG reporting’ session at our ESG@Invesco digital client event on 17 June 2021. Please click here to watch the session.