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ESG integration - Key points to consider

Our recent research revealed that 77 per cent of clients expressed ESG views during fact finds, and that 40 per cent have discussed responsible or sustainable investing with their adviser.*

With customers asking more questions, advisers are under more pressure to provide answers, which often means digging through a deluge of information from numerous providers. Discussing environmental, social and governance (ESG) issues with your asset managers or owners can help you make sense of the vast amount of data that’s available, and we’ve pulled together a few key questions to use as a starting point:  

1 What ESG data is available? 

ESG data contains information about a publicly traded company’s environmental, social and governance practices, and uses this information to create an ESG score (sometimes called a rating). 

This data can be compiled by a team of ESG analysts or through artificial intelligence (AI), or a mix of both. Using information from things such as annual reports, news sources, CSR activity, and stock exchange filings, a data provider will give a company an ESG score based on how this activity measures against their criteria. Because this criteria varies from provider to provider, scores and findings can be different for the same company, which is one of the many reasons why it’s important to understand if and how your asset manager makes use of ESG data. 

While they may have access to this information, it’s important to remember that this information alone is not a substitute for an active responsible investment approach. 

2 Understanding what analysis is applicable 

When it comes to analysis, there’s no “one size fits all” approach across asset classes. For example, investors in equity markets may have more interest in the governance aspect, whereas bondholders – who don’t have as much ability to influence companies through voting – may be more interested in social and environmental factors. Some aspects of ESG data may have more relevance than others depending on the type of investment, and even within asset classes, some ESG risks are likely to be more material to certain investors than others. 

3 What’s the overall approach?    

While steps are being taken to increase transparency, there are currently no hard and fast rules over portfolio disclosure. European Parliament and EU member states have agreed on plans to introduce “disclosure regulation” for asset owners, but the future is less clear for those in the UK. It’s up to advisers to carry out due diligence and examine the ESG approach of asset managers and owners, and to then discern fact from fiction. Some tips include evaluating funds on the integrated end to end process – not just individual stock holdings – and to look for asset owners that are signed up to voluntary initiatives such as Climate Action 100+, the PRI, and the UK Stewardship Code. 

4 What does the future look like? 

ESG ratings are often created through analysing historical data, a method known as backtesting. This means that past performance is used to gauge the financial robustness and sustainability of a company going forward – however, this model can be skewed in the wake of a scandal. A company’s score can be penalised for a past error or scandals, but this may not provide a fair indication of what the future holds - Volkswagen’s significant rebound following the 2015 Emissions-gate scandal being a prime example.