The ESG Market Is Experiencing Growing Pains. Here’s How to Make Sense of It.

August 1, 2022

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The past few months have shown just how volatile ESG investing can be.

The past few months have shown just how volatile Environmental, Social, and Governance (ESG) investing can be. First came news of a police raid on the offices of one of Europe’s largest asset managers. The raid was the result of media reports that the firm had overstated the green or sustainability-related aspects of its financial products.

Next came reports that Tesla, a company that’s virtually synonymous with sustainable transport, has been removed from the ESG version of the S&P 500 Index. While the “E” credentials of Tesla are clear, there have been come concerns among investors around the “S” and “G” factors. S&P’s move, which has not been reciprocated by other index owners, has kicked off a debate in the industry over which companies should or should not be considered ESG, and whether the “E,” “S,” and “G” components should be bundled together in the first place.

In a market where “greenwashing” is of increasing concern, investment firms need clear data more than ever if they’re to make the best decisions for their clients and themselves.

Rimes’ view is that while ESG investing is experiencing some growing pains, it will only become an increasingly key area of investment management in the years ahead, particularly as global regulators firm up rules around corporate disclosures. In the meantime, investment firms should ensure that they have access to the best possible ESG data by taking the following steps:

1. Source ESG data from a trusted aggregator of multiple sources.

Investment firms can only make accurate decisions if they have access to multiple, viewpoints from the broadest range of ESG data vendors possible, so as to best reflect the range of views taken by index providers.  Firms need to look for partners that can provide you with tools to analyse a company or peer group across multiple data vendors.

2. Develop in-house capabilities.

Investment firms should not exclusively rely on third parties for their ESG data needs. Look for a data partner that can provide you with “raw” ESG data so you can develop your own in-house research, scores, and ratings for additional insights and differentiation. Your data partner should also be able to master your in-house analysis alongside data from the market vendors.

3. Map entity relationships.

To ensure against greenwashing and to understand your true exposure it’s necessary to map entity relationships across your data universe. Look for a data partner that can provide you with ESG mastering capabilities. At Rimes, for example, we provide a curated data model that allows clients to quickly view risks that are related to each other ‒ for example, to see that governance decisions at Tesla could be linked to moves relating to Twitter or SpaceX.

Providing a pathway through the complexity

There’s no getting away from the complexities and risks of ESG investing. However, sound data and data management practices can provide firms with a pathway through the complexity, helping them to make the best decisions for their clients and for their business.

Rimes provides dependable, high-quality ESG data, analytics, and mastering capabilities that deliver data insights for better-informed investment decisions.

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