ESG Investing - Shifting Towards Sustainable Financial Markets? Tisa Forrest, Johns Hopkins University, Impact Investing Intern

The following is a review of a webinar on Environmental, Social and Governance (ESG) Investing presented by Franita Neuville, CFA. 

To set the stage based on a Greenwich Associates 2018 Future of Investment Research Study, 50% of CEOs, portfolio managers and investment analysts surveyed expect to decrease reliance on traditional investment bank research and to rely more heavily on alternative (ESG and other) data in the future.

In the Private Equity Responsible Investment Survey, 2019, the top issues impacting investment decisions were business ethics, bribery and corruption, with 89 and 97% of surveyed private equity investors saying this is a concern when exploring and implementing investment approaches. The least important issues in the private equity survey were responsible marketing and volunteering, with survey responses of 29 and 13% respectively. Diversity and community investment were also low on the list of issues at 41% and 37%, respectively.

Top Barriers to ESG Integration

As noted in the ESG Global Survey 2019 from BNP Paribas:

• 66% data – Companies need to start with strong ESG data practices.  Analysts need consistent, quality ESG data from trusted service providers. 
• Data from private equity companies and emerging markets that haven’t started implementing a responsible investor reporting framework pose a data risk. Data must be objective and, in some cases, this is hard to come by.
• 32% cost of technology – The cost to obtain alternative data can be a significant challenge.
• 21% the risk of greenwashing – Making misleading claims about the environmental benefits of a product, service, technology or company practice is greenwashing.  It’s important to have a detailed analysis of the company and as much data as possible so there is nothing to hide. 
• 30% advanced analytical skills – ESG is still relatively new, so analyst and fund managers may not be experts in the field. It’s hard for companies to find analysts with ESG skills.

Challenges in Transforming Data into Insight

Other challenges include:

• 32% Inconsistent ESG data across asset classes;
• 27% conflicting ESG ratings – What is important is for companies to ensure the provider they choose to use has a methodology that’s made public. Some companies will formalize their own model and generate their own rating;
• 22% Ineffective data for scenario analysis.

What will improve company sustainability and sustainable investing?

• Continued innovation
• Stronger regulation
• Tougher systematic market risks

Data reporting is improving but it’s still inconsistent. ESG asset managers are looking beyond the headline for information. It’s important to understanding where information comes from and why it is the way it is. Investors cannot just use ESG ratings but need to get access to the underlying data to scrutinize it and even add information that’s important for the specific analysis. Clients also want the underlying data to have choices in their investment decisions.

Build ESG Analysis Systems, Buy or Both? From the ESG Global Survey 2019, BNP Paribas

· 52 % Contract third-party technology partners in support of ESG investing
· 37% Acquire new machine learning AI systems in support of ESG investing
· 24 % Develop in-house proprietary systems
· 9% None of the above

In general, asset owners are placing more importance on social responsibility, but, while 51% of European asset owners agree that ESG is a high priority, only 27% of North America asset owners agree. This plays a role in the perception that more progress is being made in ESG overseas, since the lack of priority from US asset owners limits the willingness of investment consultants and managers to focus on ESG data.

Activists can persuade companies to clean up their act.  While only 38% of shareholders supported a recent South African climate change resolution, environmental and social activists see it as a victory.  The amount of support indicated there’s more support for climate change resolutions that previously believed. 

As millennials become financially stronger and wealth transfers to their generation, fund managers will move towards millennial concerns and desires, and millennials are twice as likely to put money in companies for social or environmental reasons. For them, doing so makes financial sense. Investing in companies with good governance protects investors from placing their money with a company that may pose a greater risk in the future due to potential operational risks, reputational risks or regulatory risks.