The importance of disclosure frameworks that allow investors to measure ESG risk accurately has come to the fore. Making sense of raw data is a challenge, particularly since the 17 Sustainable Development Goals (SDGs) and sub-objectives have introduced multiple, wide-ranging points on which to score and measure corporate behaviour.
Investors need to be able to apply data to their investment process and have access to information that allows them to target their corporate engagement where it will be felt most keenly.
Better disclosure also allows investors to hold their asset managers to account, delegates heard during a panel session at the PRI in Person conference in San Francisco.
“We need to be more discerning between greenwashing and those managers that are taking ESG to heart and doing it,” said California State Teachers’ Retirement System (CalSTRS) CIO Chris Ailman, who observed that asset managers often say they have ESG teams that, in reality, are “across the street in a little corner”.
Asset owners can prevent greenwashing by asking their portfolio managers to peel back the layers and look closely at implementation. For example, Ailman said that when managers have a core product offering and separate ESG product, it means ESG for them is more of side issue or fad, and observed that ESG integration at managers was also “an age thing”.
“I look at Millennials and they get it,” he said.
Greenwashing will also wash out if asset owners do more to articulate their ESG strategy for asset managers to respond to it.
“Asset owners need to be clear about their goals,” Payden & Rygel vice-president Peter Beer said. The panel also noted that many US asset owners still perceived ESG only in the context of exclusion and that managers could do more to expand the concept.
Delegates heard how the Sustainability Accounting Standards Board (SASB) is providing a vital framework to make sense of unstructured data.
“Our investable universe doesn’t have plug-and-play data,” Beer said. “The SASB framework allows us to take information and make sense of it in a rigorous way.”
He said it allowed investors to compare investment between regions, standardise returns and work with different data providers.
“Everyone can plug it in and talk the same language,” Beer said.
Panel members stated that consistent, uniform and high-quality ESG data from issuers that met investor standards would emerge as ESG moved mainstream. More demanding investors would not tolerate data with holes in it, Calvert Research and Management chief executive John Streur said.
“The pressure on data increases as the audience expands,” Streur said. Observing the contrast and difference in ESG data quality, he noted: “If there was the same inconsistency in reporting corporate earnings, it would be a disaster.”
He said the SASB guidelines had aided in the gathering of SDG data in a meaningful way that was relevant to “performance orientated investors. We can map KPIs that are financially material,” he said. “Nailing down the SDGs that are relevant to corporate financial results is critical.”
Global Reporting Initiative director Bastian Buck also said corporate reporting around the SDGs had become more uniform and consistent.
“The SDGs add a new perspective,” he said. “Discussions are accelerating around water disclosure.”
In another example, the GRI is looking at tax payments companies make to governments. “We are developing the first global standard for tax payments by country, Buck said.
Asset managers also need to step-up their gathering of corporate information, the panel stated. Corporations have often spent more money and time on integrating ESG into their businesses than investors realise.
“A lot of ESG information is not getting through to Wall Street,” Calvert’s Streur said. “The information is there but Wall Street is lagging behind.”
Similarly, CalSTRS’s Ailman stated how many companies complain that investors are not interested in the information they are producing. Corporation say they remain in the dark about how their disclosure affects their cost of capital.
“When CEOs see how this information affects their cost of capital, there will be levers for change,” Ailman said.