Yet businesses are under pressure to do more than just set lofty ESG targets and demonstrate action. Claims by charitable organisations and others that net-zero targets are often ‘greenwashing’ suggest that the scrutiny of ESG credentials is going mainstream.
Part of the solution here will be having robust data to hand.
When it comes to data there are three questions to ask. Do clients understand why a stock or issuer has a particular ESG rating? Is the data used in ESG metrics and reporting clear and traceable? Is the methodology in which it was calculated clearly articulated and explainable? If the answers are no, the fund is susceptible to client, stakeholder, and regulator challenges.
Third-party ESG data providers are an important part of the solution for many looking to paint a picture of the ESG performance, but they are not a magic bullet. The methodology applied by third parties can be what’s known as ‘black box’, meaning it’s difficult to interpret and interrogate. This means it’s hard to understand and report to investors.
What is more, the methodologies are typically ‘off the shelf’ and not necessarily aligned to specific goals or investment approaches. Without applying a tailored reporting methodology that aligns with the company's investment ethos it is difficult to report against what was set out at the beginning.
Leaders in this space have true ‘glass box’ transparency and traceability in all their reporting. Many are investing in their reporting and are defining their own bespoke ESG data and scoring methodologies underpinned by market consolidating metrics.
Combining internal data sets with more qualitative data such as news, non-governmental organisation reports and social media can help to build a richer view of ESG performance.
Looking forward
ESG will continue to grow in prominence – and this is undeniably a good thing for asset management and wider society. Traceability and transparency from the top down are critical to elevating reporting and effectively communicating an ESG strategy.
Those companies putting ESG at the heart of their ambitions will be best placed to survive and prosper.
Jonathan Coates is director in KPMG UK’s Wealth & Asset Management Consulting practice
