Growing public demand for sustainable investment is hindered by traditional investment approaches that do not implement a principles-based and outcome-focused model, according to a new study – Redefining value in ESG: The myriad of paths to the summit.
This is the third and final report authored by Rebecca Healey, managing partner of Redlap Consultancy and commissioned by the Futures Industry Association’s European Principal Traders Association (FIA EPTA).
It investigates key strategic trends in European markets, focuses on buy-side needs relating to ESG and sustainable investing.
Survey participants include ESG specialists, portfolio managers, liquidity providers, exchanges, and head of trading at asset managers.
The report outlines two primary concerns: greenwashing risks caused by incomplete or insufficient ESG data; and over-reliance on traditional exclusions-based investing.
The data challenge has been well documents but as the report notes, access to relevant, more accurate and granular data regarding the underlying investee companies including subsidiaries and supply chains will be at the core of improving the efficiency and effectiveness of sustainable investing.
Buy-side firms are already using data from multiple providers. Filtering it to the
appropriate level – and adding their own understanding of a company’s sustainability credentials relative to the investment strategy in question – will only enrich their
decision-making process.
To address these challenges, asset managers require new methods to generate and manage actionable data and insights, the report argues.
This includes a broader concept of “value” to manage data, ensure trust in ESG assets, and reflect more than commercial outcomes — such as alignment with the United Nations’ Sustainable Development Goals (SDGs).
The report found that 65% of respondents now embed ESG factors as part of their investment process across all funds, with one-third only offering separate ESG funds.
In addition, 70% say that data and technology continue to increase in importance in deciding where and how to trade.
“As investment strategies pivot away from commercial concerns to meeting broader SDG objectives, the web of complexity is increasing. Understanding exactly what investment you are making, and with whom, has never been more critical,” says Healey.. who is also is co-chair for FIX EMEA and a member of the Consultative Working Group (CWG) of ESMA’s Secondary Markets Standing Committee.
She adds, “Sustainable investing remains highly subjective despite regulatory efforts to provide objective clarity. As ESG expands, from green energy and biodiversity to social impact investing such as zero hunger and quality education, it is clear that overly simplistic exclusion policies will need to be rewritten.”
Healey believes that the first step for the industry is to move towards greater principles-based regulation around sustainability to gain access to accurate and consistent data.
“That is the most effective base camp solution for the sustainable investment mountain that lies ahead,” she says.
Piebe Teeboom, secretary-general of FIA EPTA, says, “Rather than complicating the journey for asset managers by insisting there is only one route open to them when making sustainable investments, we should adopt a more data-driven approach which allows choice and preference, as long as the summit of sustainable development is achieved.”
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