By John Tobin, Data Architect, Solidatus
From the climate emergency to the Covid-19 crisis, to social injustice and political uproar – the world has had one of its most tumultuous and unpredictable years on record.
During this time, the trend of Environmental, Social and Governance investing (ESG) has been quietly gaining momentum. Some had speculated that, while the world was in the grip of the virus, the ESG focus would quickly fade. Sceptics argued that ESG related issues would undoubtedly take a back seat as many companies battled to stay afloat.
Despite the odds, when markets dropped last spring, sustainable investing remained resilient. By the end of 2020, total assets in sustainable funds hit a record high of almost $1.7tn – up 50% over the year – on the back of a record year for sustainable fund sales. Europe also paves the way, proving to be the most developed market by accounting for nearly 70% of the global sustainable fund universe.
The coronavirus pandemic has thrown a brighter spotlight on the Social aspect of ESG, with investors and society increasingly focused on how companies treat the entire organisational ecosystem, from employees and suppliers to shareholders alike. However, as the landscape continues to evolve and grow in popularity, it’s important to note that ESG isn’t necessarily as simple as it seems on the surface.
Layer upon layer of ESG assessment
A company’s principles and values drive ESG programmes and reveal how effectively a company is addressing climate change risks, social impact, and their own governance. Those companies with good ratings are included in sustainable company indexes, with rating agencies applying additional ESG scores as a guide for investors.
ESG factors and their corporate markers have become increasingly important for businesses to understand, measure and strategically prioritise. But this is still a fast-growing area, and that increases the volumes of conflicting standards as more and more people take an interest in the results. It can even be extremely challenging for organisations to successfully relate their principles and priorities to their own ESG aims. This is seen in a recent study, where 81% of respondents said that their company has a formal ESG program in place, however there was not a high level of confidence that companies are effectively performing against all of their stated ESG metrics.
In practice, the simple concept of ESG implementation currently brings forth a range of hurdles. One survey conducted by shareholder advisory business Squarewell Partners found that more than half of the top 50 asset managers are developing their own internal ESG ratings systems – while two fifths also use data from at least four separate ESG ratings agencies.
Many rating agencies use a variety of metrics and rating methodologies, and most of which have industry sector specifics. For example, if your company is to be included in an index, then you’ll need to have a compatible set of metrics for their specific method. Many are also finding that they need to think well beyond their own company walls for effective reporting. Depending on the applied criteria, some are looking at broader parameters such as their supply chain (for example, when it comes to scope 3 carbon emissions). ESG ratings and how they are scored can also vary wildly between investors, potentially adding yet another set of goalposts for businesses to assess and monitor. All in all, ensuring that an ESG programme is more than a painful set of periodic data gathering exercises needs flexibility and capability to understand the relationships between many moving parts and a company’s priorities and performance.
Even businesses with the highest of ideals could feel the current process is needlessly complex. But help is at hand, for those looking to relate their company principles and align priorities to ESG aims, while also scoping in the various disclosures, assessments and regulations that will help to demonstrate progress. By looking at the issue of ESG less as a multitude of differing external assessments and instead relating an organisation’s own ESG data flows as technical data lineage, businesses can find their way to map their company’s own specific footprint. This process can span from source through processing to their destinations in the various disclosures and assessments.
Some of our customers are already using change management facilities to assess the impact of regulatory change and implementation of data projects, to keep track of their ESG programmes. And with the powerful visualisation, filtering and querying available through platforms like our own, it is easy to highlight areas to focus on. We’re helping companies move from disconnected PDFs, spreadsheets, Visio diagrams and PowerPoint presentations to current, transparent and valuable assets for planning and executing their ESG programmes – in one fell swoop.
Today, we are seeing a growing awareness of sustainability across every sector and this transition represents an exceptional market opportunity for many businesses, not to mention a long overdue interest in the sustainable impact of business on the world around it. Navigating the various approaches applied by the different parties in this chain, from asset manager to ratings agency to the business itself, may feel like taking on too much, too soon. But the tools already exist for companies to clarify this perceived complexity, if businesses look at it from a (meta)data perspective rather than a series of different, independent audiences to please with varied standards. Early movers who can cut through this challenge will find themselves at the vanguard of a fast growing and sustainable investment future.