Practical tips for integrating ESG into investment decision making
Global interest in environmental, social and corporate governance (ESG) investing is greater today than it’s ever been yet implementing ESG strategies can be a complicated process for superannuation funds and other institutional investors. Currently there are no clear, regulated guidelines to follow. And while the increased interest in ESG investment can only mean good things, the spectrum of investment types and range of terms used are increasingly causing complications for investment managers.
Without clear and consistent definitions and the data to compare and analyse, the best intentions can end up being little more than a policy statement and a public relations exercise.We discussed this issue as well as ESG best practice in our Virtual Roundtable, Making ESG Work. Our guest speakers, Stephen Huppert, Independent Consulting and Advisor, and Rachel Alembakis, Managing Editor of FS Sustainability at Rainmaker Information, discussed these key challenges and more, commonly faced when implementing ESG investment strategies.
The event garnered a wide response from financial and investment sector firms across both, Australia, and New Zealand. However, if you were unable to attend, here are our key takeaways:
1. Defining ESG from the outset is critical
ESG means many different things to many different people, but at its fundamental core, ESG is about values. However, since each investor has their own individual moral compass, deciding on a large scale what should be considered an ESG investment opportunity is only increasing in complexity. Especially since each investor and jurisdiction outlines what an ESG company is, differently. So, what can investment managers do?
While the International Organisation of Securities Commission (IOSCO) has initiated a project to produce a set of global uniform sustainability disclosure standards, it is in the early works. In the meantime, the best course of action investment management firms can take is to outline the ESG aspects of the companies they invest in and ensure they align with their investors’ value.
2. It’s a game of data and better judgements
Defining a company’s ESG rating is a difficult process and has long been a standing point of contention for investment managers; likely one of the reasons many focus on short-term results instead. While credit rating agencies have a high level of correlation between scores (S&P and Moody’s is around 0.99) the ESG rating agencies scoring differs greatly, with an average correlation of 0.61. As there is no clear governance and regulation on what constitutes an ESG rating, firms and investment managers need to read the data and evaluate its worth in comparison to their investors’ values.
3. Efficiency tools are necessary
As time continues, the variance of what constitutes an ESG rating is only likely to increase. Unfortunately, causing further complications in measuring and managing ESG investments for investment managers. Software providers like AlphaCert are developing the investment management tools needed to efficiently evaluate ESG data and make appropriate investments.
AlphaCert partners with Refinitiv, one of the many global providers of financial market data and infrastructure. Refinitiv provides ESG data at organisation level spanning 474 measures, across 17 pillars of ESG. Which cover a range of elements that all affect an organisation’s ESG score and overall investment opportunities.
With this data at hand and organised effectively, integrating ESG into investment decision making is easier to manage and relay to clients.
In summary, ESG is quickly becoming the key attribute investors are looking at when investing. So, to meet demand, it is critical that investment management firms look to establish ESG guidelines internally until higher global standards are provided. As assurance and transparency are key, providing established guidelines to investors will ensure those more ethically motivated understand and are satisfied with where their investments are going.
For more on ESG best-practise methods and tools available, watch our Virtual Roundtable where our exclusive panel discuss how to operationalise ESG in your investment data.