ESG is all the rage—with BlackRock’s Larry Fink and Bank of America CEO Brian Moynihan the latest to touts its necessity—so a Davos angle was, of course, expected.
The World Economic Forum addressed the issue on its website as the gathering of the global elite arrived in the quaint Swiss town. Environmental, social and governance issues are the WEF’s focus, and it eagerly jumped on board
“Over the last three years, environmental, social and governance (ESG) metrics have become a key input in investor, employee and customer decision-making, with a particular emphasis on the “E”—even for those companies that aren’t otherwise regulated by environmental laws,” Davos delegate Sari Granat, Executive Vice-President of IHS Markit, wrote on Monday.
While, thematically, the direction in which ESG investing headed is clear—more disclosure and transparency—there are two issues that currently limit the impact of ESG reporting and evaluation, he noted; 1) the quality of data, and 2) goals and targets.
Quality of data
Like many industries, and the 401k space in particular, the standardization and sharing of data would exponentially benefit the end-user (participant), but how its best implemented is still an issue, with cost and the competitive factors inhibiting progress.
Similar concerns affect ESG, and an ISO-style solution is needed, Granat argued.
“While many companies are working to improve their data and related analytics, and a whole new industry of advisers, auditors and analytic experts have emerged to assist in these efforts, progress and true visibility will be limited until we agree on common meaningful standards and build trust in how data is reported.”
Goals and targets
Stakeholders may be leading the way by voicing what they care about, “and our regulators are pushing hard for change, but it is up to [the] industry to provide our investors, employees, customers, regulators and politicians with the visibility they are demanding,” Granat concludes.
“Companies need to engage more deeply in the ESG-reporting processes and help information services providers get to the right data. And we all need to be bold and identify ambitious targets across ESG, to help our stakeholders see where we are going, and how and when we hope to get there.”
MSCI’s take
While a growing body of evidence has suggested a correlation between ESG factors and the positive performance of companies that adopt them, a high-profile research report released late in 2017 from MSCI provided the all-important causal link.
Not coincidentally, the research and consulting firm published “The MSCI Principles of Sustainable Investing” on Tuesday, which it calls “a framework designed to illustrate specific, actionable steps that investors can and should undertake to improve practices for ESG integration across the investment value chain.”
The framework includes three core pillars to full ESG integration:
Investment strategy: Asset owners should integrate ESG considerations into their processes for establishing, monitoring and revising their overall investment strategy and asset allocation.
Portfolio management: Portfolio managers should incorporate ESG considerations throughout the entire portfolio management process, including security selection, portfolio construction, risk management, performance attribution and client reporting.
Investment research: Research analysts assessing companies and issuing investment recommendations to portfolio managers should integrate ESG considerations (including ESG company ratings) into their fundamental company analysis.
“The world is rapidly evolving due to dramatic environmental, social and governance shifts, including the effects and implications of climate change and the move to a low carbon economy, which will significantly impact the pricing of financial assets and the risk and return of investments, and lead to a large-scale reallocation of capital over the next few decades,” Henry Fernandez, Chairman & CEO of MSCI, concluded.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
