Investing in environmental, social, and governance assets may seem straightforward, but when it comes to matching assets with exact client needs it is far from it.
Data underlying ESG investing is complex and often not comparable.
Yet while some are calling for a uniform data framework to govern ESG assets, others argue implementing such a prescriptive solution could hamper innovation in this complex field.
So how can advisers navigate this quagmire?
Srinath Narayanan, chief executive of Project Energy Reimagined Acquisition Corp, a special purpose acquisition company with a focus on high-potential ESG targets, says ESG has become so big it will will soon be impossible to have all three elements sit under a single umbrella.
He speaks to FTAdviser In Focus about what lies ahead and how advisers may tackle the search for the most appealing ESG opportunity for their clients.
FTA: How can advisers best navigate the challenges posed by ESG investing?
SN: One of the first steps advisers have to take is identifying the core ESG factors that matter to their clients. There are different elements and characteristics that fall within the ESG spectrum that are weighed differently.
We’ve seen numerous ESG measurement systems and matrices that have been created by advisers, but nothing that broadly governs this practice.
The lack of consistency in ESG reporting across industries and between companies in the same industry has been a challenge for investors aiming to create fair comparisons or to get an accurate read on how companies are thinking about and managing ESG programs. For instance, in poultry or animal farming some view greenhouse gas emissions and abatements equally important as social issues around animal rights.
Similarly in transportation, coal or diesel as a pollutant in managing carbon footprint is equally important as employment labour policies, and human relations. The key is consistency across metrics and frameworks.
With a lack of uniform standards, ESG reporting guidance framework from the independent Sustainability Accounting Standards Board is broadly used by asset managers and industrial companies.
SASB’s approach to ESG is to categorise industries and sectors and then use nuances of each industry to define the materiality of specific sustainability accounting criteria. This assessment of materiality is a key differentiator from other frameworks.
As the ESG sector continues to evolve we will undoubtedly see more changes, especially as regulators look at more strict oversight of greenwashing and ESG data capture.
FTA: Should there be a universal ratings system or would that stifle competition in this complex area?
SN: A universal ratings system wouldn’t necessarily stifle competition. Defining a minimum set of reporting requirements across industries and capturing the nuances of ESG issues are important.
The challenge is broad application across all industries. The value chains and starting points for each industry are different and a scoring system needs to reflect that.