On April 4, RIMES hosted its inaugural ESG Forum in London. In the first session of the day, Chris Johnson from HSBC Securities Services provided an overview of some of the key trends and challenges around ESG data. What follows is a summary of his presentation.
As market interest around Environmental, Social and Governance (ESG) criteria for investments increases, effective measurement is going to become critical. As Chris made clear throughout his presentation, however, it is going to take some time and much cost before ESG ratings and scores can be used to grade investments with anywhere near the same level of utility as financial data.
ESG factors are coming under the spotlight because the concerns that underpin them are increasingly becoming a condition of doing business. Consumer demand for sustainable, impact and responsible investment is growing and regulators are increasing looking to enforce disclosures from companies to prevent ‘greenwashing’ (the practice of deceptively promoting the expectation that an investment vehicle has green credentials).
As Chris explained, the challenge facing the investment sector comes from the fact that ESG ratings and scores from ESG research providers are generally used as a starting point for analysis rather than as off-the-shelf investment data. Additional analysis, often quite substantial, can be required before the data can be used to support investment decisions. HSBC’s recent comparative study into top ESG data vendors and research providers found little or no correlation in how these providers rate a sample portfolio of companies and the data can vary significantly between providers. In fact, the analysis by Chris and his team at HSBC suggests that the only uniform, factual, asset-level, quantitative ESG dataset existing today is for carbon emissions.
Looking at the different types of asset class, Chris noted that ESG data is generally geared towards equities and fixed-income. At present, ESG data is usually sourced from suppliers for assets using issuer-level company data – regardless of asset class. Fixed-income assets are then measured alongside the equity issuer. As Chris made clear: this is a fairly unsophisticated approach to measurement that means investment firms have to perform detailed analysis in-house for non-equity asset classes.
Chris then outlined some of the initiatives that will help further the ESG market and enhance the measurability and standardization of ESG criteria. This includes company reports, such as HSBC’s own report into sustainable finance, as well as initiatives from the likes of the Task Force on Climate-related Financial Disclosures (TCFD).
On this note, some leading ESG research providers have indicated that they are developing outcome-based measurement, using the United Nation’s new Sustainable Development Goals (SDGs) as data inputs. The SDGs aim to improve health and education, reduce inequality, and spur economic growth while combating climate change. Chris suggested that with developments such as these, it’s possible that new fact-based ESG data standards might emerge as regulators provide further guidance over time.
To conclude his presentation, Chris reminded the audience not to have a false sense of security around ESG data. The availability of uniform quantitative data is currently limited at best – something that could possibly be remedied with increased corporate disclosure requirements. For the present, quantitative and uniform measurement has not yet caught up with the ESG world – so firms should take a long look under the hood of ESG data, to ensure it meets their needs, before making any decisions.
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