TSAM: Industry needs to become more comfortable around ESG
11 March 2020 London
Image: Shutterstock
When it comes to environmental, social and governance (ESG), the industry needs to start becoming more comfortable about being uncomfortable in terms of an exact definition, according to one panellist at The Summit for Asset Managers (TSAM) in London.
The panellists discussed ESG and how many in the asset management industry are uncomfortable about the lack of definition relating to ESG.
One question often asked relating to ESG, according to the panel, is how the ESG process works when it comes to interacting with different companies.
In addition, people are asking how you test ESG, measure it, and how that is then integrated into global asset integration models.
One speaker said: “I would encourage you to not be so scared in the beginning about the terminology – it is about offering choice to the market. As asset managers, we want to be transparent about what we want to do for ESG so that you can make an informed decision.”
Currently, there is no standardised framework on ESG, and it encompasses social issues as well as factors relating to climate-change-related issues.
The lack of standardisation means that while one company may see investing in tobacco as unethical, for example, another company might not agree, making it a matter of opinion.
“A more standardised framework would be helpful but there is some way to go in this space. For example, as an investor, if you see the green bond label you still may have no idea if it is following the guidelines as this encompasses lots of different things,” one speaker cited.
The panellist continued: “Regulation is going to help to make those labels more meaningful for investors. We know the ‘E’ in ESG is more about environmental issues, but you still need to look at the broader range of social and governance issues.”
According to a panellist, there is a risk that if everyone leaps on taxonomy being the answer to everything, then best in class type funds are going to end up with a very low investment alignment.
“So you have to be careful about how much trust you put in regulation and make sensible decisions around that,” the speaker warned.
Another speaker observed that while regulation is stepping in, investors would like to see regulation around disclosure.
“There is nothing wrong with different shades of green, but this has to be transparent. It gets murky when you define what is green and what is not green, whether it is more on the social side or more on the environmental. This industry is still young in the grander scheme of things, and innovation is only going to grow even further, so trying to codify that now in this early stage is going to be a huge mistake, I think,” the speaker said.
Also discussing how broad ESG can be, another panellist commented: “Some analysts understand the data in terms of integrating ESG but this is not always the case. For this issue of embracing the richness of data, I would encourage you to not reduce ESG to 'sustainable' and 'not sustainable' because it all means different things to different people. Embrace the qualities behind each investment story.”
The panel also noted that although ESG has become more mainstream, it is not new. One speaker said: “ESG is not new, it has been around for decades but what is new is the attention around it. While this is a great step forward, and everyone is thinking about how ESG will affect their performance, the downside is there is a lot of noise around it.”
Panellists agreed on this point and observed that many people are saying they 'do ESG' but it is difficult to differentiate, and so steps need to be taken to implement policies.
One speaker on the panel concluded: “Make a start and be transparent about how you do this. Embrace the ‘ESG evolution,’ but be genuine in what you do, manage expectations – I think that will help the industry as a whole.”
The panellists discussed ESG and how many in the asset management industry are uncomfortable about the lack of definition relating to ESG.
One question often asked relating to ESG, according to the panel, is how the ESG process works when it comes to interacting with different companies.
In addition, people are asking how you test ESG, measure it, and how that is then integrated into global asset integration models.
One speaker said: “I would encourage you to not be so scared in the beginning about the terminology – it is about offering choice to the market. As asset managers, we want to be transparent about what we want to do for ESG so that you can make an informed decision.”
Currently, there is no standardised framework on ESG, and it encompasses social issues as well as factors relating to climate-change-related issues.
The lack of standardisation means that while one company may see investing in tobacco as unethical, for example, another company might not agree, making it a matter of opinion.
“A more standardised framework would be helpful but there is some way to go in this space. For example, as an investor, if you see the green bond label you still may have no idea if it is following the guidelines as this encompasses lots of different things,” one speaker cited.
The panellist continued: “Regulation is going to help to make those labels more meaningful for investors. We know the ‘E’ in ESG is more about environmental issues, but you still need to look at the broader range of social and governance issues.”
According to a panellist, there is a risk that if everyone leaps on taxonomy being the answer to everything, then best in class type funds are going to end up with a very low investment alignment.
“So you have to be careful about how much trust you put in regulation and make sensible decisions around that,” the speaker warned.
Another speaker observed that while regulation is stepping in, investors would like to see regulation around disclosure.
“There is nothing wrong with different shades of green, but this has to be transparent. It gets murky when you define what is green and what is not green, whether it is more on the social side or more on the environmental. This industry is still young in the grander scheme of things, and innovation is only going to grow even further, so trying to codify that now in this early stage is going to be a huge mistake, I think,” the speaker said.
Also discussing how broad ESG can be, another panellist commented: “Some analysts understand the data in terms of integrating ESG but this is not always the case. For this issue of embracing the richness of data, I would encourage you to not reduce ESG to 'sustainable' and 'not sustainable' because it all means different things to different people. Embrace the qualities behind each investment story.”
The panel also noted that although ESG has become more mainstream, it is not new. One speaker said: “ESG is not new, it has been around for decades but what is new is the attention around it. While this is a great step forward, and everyone is thinking about how ESG will affect their performance, the downside is there is a lot of noise around it.”
Panellists agreed on this point and observed that many people are saying they 'do ESG' but it is difficult to differentiate, and so steps need to be taken to implement policies.
One speaker on the panel concluded: “Make a start and be transparent about how you do this. Embrace the ‘ESG evolution,’ but be genuine in what you do, manage expectations – I think that will help the industry as a whole.”
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