ESG has faced an “identity crisis” this year and investors need to up their game by using proof points to illustrate effectiveness, demonstrate ESG’s contributions to portfolio returns, and show the outcomes achieved through engagement, experts say.
Against a backdrop of increasing attacks on sustainable investing by some media outlets and politicians raising questions about the effectiveness of ESG practices in portfolios and in the real world, ESG heads at major funds and managers said it was up to the industry to better communicate its progress.
Lucy Thomas, global head of sustainable investment at UBS Asset Management, said funds’ ESG goals were competing for perceived importance with other issues to emerge this year like inflation, rising interest rates, geopolitics and energy security.
Speaking at the Investment Magazine Fiduciary Investors Symposium held at Healesville in November, in a panel discussion examining global and domestic trends in sustainable investing with a focus on evidence, data and other proof points, Thomas said climate has “in some ways gone down in the agenda [from] where it was urgent versus important.”
“It charges us within the industry, and those of us particularly within sustainable investment, to really raise our game in terms of what investors can do,” she said.
While corporate engagement in recent years has built a foundation to establish norms for disclosure, target setting and having appropriate board governance, this engagement model needs to evolve towards better outcomes reporting, Thomas said.
“There’s a need for stronger, more detailed and technical sector-specific data points to understand how companies are tackling the [climate] issue,” she said.
Engagement and dialogue
Andrew Parry, head of investments at responsible investment pioneer Regnan, part of the Pendal Group, said the industry needs to be wary that engagement does not devolve into a social obligation that follows from bold statements about carbon objectives.
Regnan is collaborating with the University of Exeter’s Global Systems Institute to build horizon climate models that model the forward-looking transitions of companies and look at the probability of these transitions being achieved.
“So we’re finding that data science is a great way of having a dialogue with companies about how their actual rhetoric is lining up with the real world,” Parry said.
Affirmative Investment Management (AIM), a dedicated fixed income impact investor, produces an annual report that talks specifically about the impact of each portfolio.
Katie House, partner, sustainability at AIM, said this makes it critical to have the ability to show evidence of impact, right from the beginning of an investment process.
“On the sustainability team, before anything enters [AIM’s] investable universe, we’ll do deep analysis on the [bond] issue, and the issuer,” House said. “Part of that will be to understand the positive impact that could be generated.”
There also needs to be a strong commitment from the issuer to report impact in a way that is good enough for AIM’s purposes, she said.
Liza McDonald, head of responsible investments at Aware Super said the super fund had made steps to ensure members could understand its product disclosure statements and PRI transparency reports which were often lengthy and technical.
She said three years ago Aware Super had created and introduced a proprietary reporting methodology to report on its environmental and social impacts, two years ago published its Stewardship Report, Destination Net Zero Report, which was TCFD aligned, and this year a Responsible Investment Report.
“I would also say we’ve done a lot of internal reporting, reporting to our board, reporting to our investment committee, reporting to internal stakeholders,” McDonald said. “But trying to translate something that’s very technical or complicated and complex like ESG integration, or sustainable investing, to a member, requires a certain skill set as well.”
