The data problem
Data is also one of the largest challenges faced by the sector. To be able to make informed investment decisions, investors and managers require reliable and detailed ESG related information. Unless managers create their own extensive research capabilities to collect, analyse and monitor this data across the investment universe, there’ll always either be a limited focus, or some reliance on third parties. There are several research providers that aim to collect and make such data available, but a comparison between their findings, for almost any company, brings the challenge into sharp focus.
Royal Dutch Shell, one of the largest global oil and gas companies, receives a ‘high risk’ rating from one of the leading ESG research providers. Another provider makes industry specific comparisons leading to an AA ‘ESG leader’ rating for the same company. This is just one example, and part of the problem lies in the interpretation and analysis of data, rather than just its collection and presentation. However, unfortunately, inconsistencies and conflicting information are widespread in the industry.
We aren’t yet at a place where companies worldwide and across all industries have enough of an incentive, or are required, to accurately record and disclose their ESG credentials. For some smaller companies, their sustainability may be considered inferior in comparison to larger, perhaps more questionable companies, purely as the latter has the ability to invest in provision of data. This murkiness, both at the company and research provider level, gives way to another of the industry’s current obstacles, ‘greenwashing’. In the current environment, it’s too easy for companies, funds, or investment solutions to portray themselves, intentionally or not, as greener, or more ethical than they truly are, and investors can struggle to distinguish between those that really are suitable for them and those that aren’t.
This is highlighted in the number of funds now investing in line with manufactured ESG indices. These can be widely used global indices, often adapted from a standard non-ESG index, designed to address the needs of sustainable investors while maintaining a broad universe to invest in. Investors could be forgiven for assuming that the ESG index, and therefore funds tracking it, was selective in its approach and had exposure only to companies with strong ESG credentials, notably improving the sustainability of their portfolio. However, many of these indices, and by extension, the funds tracking them, remain invested in up to 98% of the original holdings of the non-ESG parent index.