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A lack of standardization, and the confusion that this absence of comparability causes, is one of the key challenges in ESG data, Alexandra Mihailescu Cichon, Executive Vice President of Sales and Marketing at ESG research provider, RepRisk, told delegates at the Responsible Investor Digital Festival: Summer 2020 (RI DigiFest).
Information can be biased, incomplete or mask risks, yet this comes against a backdrop of growing demand. Asset owners “are asking more questions” and asset managers “are asking more of their data providers” as responsible investment matures and investors integrate ESG across asset classes: “People want to look under the hood,” she said.
RepRisk looks at ESG through an outside-in risk lens that excludes data that a company reports itself. Rather than combing through a company’s policies, it looks instead at data sources like government agencies and media across 20 languages, all external to the company. There is also the topic of timeliness; annual updates do not meet investors’ needs,” she warned. “Our data is updated daily.”
Louise Aagaard, ESG Analyst at Denmark’s PKA pension fund, told delegates that the fund is targeting 10% ESG integration by 2023. Its strategy includes prioritising companies with high ESG scores versus the benchmark, engagement and supporting investor coalitions. The fund excludes entire sectors like tobacco, alongside individual companies.
Aagaard referenced PKA’s engagement and subsequent divestment in 2019 of oil giant Exxon regarding the company’s persistent lobbying to block climate change policies and resolutions. She also told delegates that ESG integration without compromising returns is “not always straightforward.”
For example, she noted that it is easier to build low carbon portfolios by investing in companies like banks and consultancies, yet this doesn’t move overall investment towards the Paris goals. Alternatively, high-performing companies, both from an ESG and returns perspective, are often in developed markets. Moreover, as appetite for green investment grows, she said, competition for assets has increased. She said the pension fund needed to look to new regions like Asia where renewables are less established.
Tara-Jane Fraser, Senior Governance & Sustainability Analyst (Research & Engagement) at Baillie Gifford explained how the asset manager has increased its range of tools, frameworks and methodologies to extract data. Its strategy involves balancing source data with opinion data, tools that look backwards and forwards, analyse range and breadth and allow the team to “get really involved in the investment process,” she said.
Baillie Gifford’s ESG teams discuss a stock in-depth before it is taken into the portfolio in a research process that also informs engagement and voting. She told delegates how the firm has changed its approach to stewardship, strengthening its ability to be a “proactive steward.” She listed engagement highlights like the asset manager working with Ryanair around shareholder voting rights and using its influence at another investee company to try and put independent directors on the board. In another strategy she said the team had actively supported a struggling management team.
“If I want to assess alignment and don’t have the data it becomes an automatic barrier to investing,” she said, adding that source data is the most important kind of material. The asset manager is engaged with companies to ensure source data is audited, transparent and consistent, she said. “Needing to trust the data is absolutely key.”
The panel speakers said that consistent corporate data was essential to identify opportunities and potential stranded assets. But Fraser cautioned that regulation is not necessarily the best approach to force companies to improve their data: “Regulation can be well intentioned, but we don’t want to add complexity to what is a simple task,” she said, likening data provision to companies existing annual reporting processes or other frameworks: “The tools are in place,” she said, saying that companies should realise that there is little difference between reporting non-financial and financial data.
Panellists also noted how directors are increasingly being pushed on their climate competency. Moreover, some companies are improving governance by adding committees of expertise to look at climate change, they concluded.