Steering The Clumps of ESG Metrics
Having an investment is one of the best things any individual or family can do for themselves. But investments of any type are not as straightforward as most people would think. With no ESG (Environmental, Social, and Governance) measurement and reviewing standards, funds and products can confuse investors. Besides that, capturing accurate data for impact investments is both time and effort consuming. And in many cases, rating companies or agencies do not have the time or willingness to go through that process.
With ESG investors, the major problems include:
- an excess supply of frameworks and tools
- identifying useful and expected measures
- varying rating scores and standards set for varying companies
- different standards set from different angles in the market
A standard definition of ESG
One major issue that experts have stated is the lack of a standard definition for an ESG product. Julia Paino, the co-chair of impact investing Nexus, has said that several agencies measuring and awarding ESG end up rewarding companies with zero fundamental sustainability.
Several companies have been awarded the ESG award simply by attaching a picture of their climate report, be it accurate or not. And other companies have had to go through strict reporting to be awarded that same honour. To curb the various confusions about the best ESG rating, the EU has proffered a solution using a sustainable investment fund approach. However, this comes in a less flexible setting and requirements set for asset managers interested in marketing funds as sustainable products.
The impact of the sustainable investment fund so far
Although still in its early days, the newfound approach is slowly being incorporated. A major example of that is next month’s launch by the International Financial Reporting Standards Foundation. There they hope to establish standardized reporting metrics for ESG. However, this might pose a problem for rich individuals or families whose focus is on social conventions. The new ESG’s approach may be too uptight for them, depriving them of the rating they seek.
Concerns and worries about the new standard
Several experts have stated that although the new approach is a better and more controlled ground for the long run, they are more concerned about the factors set to validate the ranking standards. They speak about the resources asset and wealth managers are deploying to truly understand the company’s investment stand.
These experts explain that the most important point is identifying where investors are putting their money into. The primary question should be what the investment options investors are considering are? Are funds going more into the public equities, or are they going directly to privately held assets like venture capital and private equity deals?
The concept here is that investors individual and family offices have varied approaches to how they invest. Most family offices will have in house metrics for deciding which deals they will take. Hence investment managers must get closer to understanding that a central rating system should be employed instead of theirs.
There is a clear-cut difference between managers; there are the passive managers and the active managers. The passive managers follow whatever standard is taking on a more dominant approach in the industry. In contrast, the active managers have developed their metic standard on sustainable products and investment.
If these two classes of investment managers are called on to take up this new rating approach, they can actively influence the investment options of their clientele. Many companies simply depend on the managers and their due diligence in rating or reviewing an investment. So if these managers can direct them to the right investment plans, companies can truly earn an ESG badge.
References
https://www.ft.com/content/75a9ed73-6f49-466f-a1d2-55be96678637
https://www.sec.gov/news/speech/lee-climate-esg-board-of-directors